Financial analysis

Financial analysis is the use of financial figure for assessing financial strengths and weakness.The financial figure are contained in financial statements consisting of balance sheet,income statement,and cash follow statement.
Financial analysis examines relationship between two numbers to measure financial soundness,profitability,and efficiency.It is a valuable part of SWOT analysis.
Tools of financial analysis
a.Ratio show relationship between figure for evaluating financial performance.They identify strengths and weakness in financial performance.The popularly used ratios for financial analysis consist of:

• Liquidity ratios :The measure ability to pay back short term debts. Current ratio is a good indicator of liquidity.It is an important indicator of risk.
• Profitability ratios :They measure the overall efficiency of operations.These ratios express profits as percent of sales or total assets.
• Activity ratios :They measure the efficiency in resources use of activities related to manufacturing,marketing,and inventory.
• Leverage ratios :They measure the efficiency ability to meet long term financial obligation in terms of debts.They are also known as solvency ratios.They deal with capital structure.

b.Economics value added :It defines profitability in terms of the return on capital above the cost of servicing the capital employed.It is the wealth created for owners.It is based on the idea that earning should exceed the cost of capital investment.
This tool in useful to identify addition to assess strengths and weakness.

• Activity based costing :It identify specific activities and assigns costs to activities responsible for creating cost drivers.It keeps tab on the costs within each activity.It identifies cost drivers.They are factors are that cause costs.It also estimates costs of same activities of the rivers.This tool is useful to identify cost drivers for assessing strength and weakness .
• Financial analysis is a convenient and reliable basis for assessing strengths and weakness.But financial statements have limitations.This limits the strategic use of financial analysis.