Prospects for the Future

Past and present information helps to take decisions about the future.

• To Take Equity Investment Decision: The objective of investing in equity is to earn return. Returns are uncertain and risky. Hence, financial statement analysis helps to forecast the return. An investor also tries to assess the earnings potential of the firm as it will affect the market price and the amount of dividends the company will pay.

• Credit Extension Decision: Credit suppliers to the firm such as commercial banks, financial institutions etc. face the risk of default in receiving timely interest and return of principal. They use the financial statement analysis to determine the short-term credit generating ability of the firm to extend credit facilities. The risk of extending credit facility depends on how easy it is to predict the future prospects of the company i.e., profitability or liquidity.

• Corporate Bond Investment Decisions: The investors in corporate bonds, i.e., debenture holders use financial statement analysis to look into the long run viability of the firm using the financial statements.

• Competitors: Firms also analyze the financial statement of a firm to determine market share, pricing, product mix, strategies and growth plans of their competitors.

Thus, the major objective of financial analysis is to diagnose the information contained in the financial statements based on which, one can judge the profitability and financial soundness of the firm.

The objectives of financial statement will vary depending upon the perspective of users of the financial statements:

1. Creditors want to know about the short-term liquidity and long-term solvency. Short-term liquidity refers to how much cash a company requires and has to meet the current liabilities such as wages, salaries, interest and so on. Long-term solvency refers to the company's ability to generate funds to repay the long-term liabilities.

2. Investors want the profitability of the business. Dividend payments depend on the profitability of the concern and stock prices depend on the company's future prospectus. Even creditors also want to know the profitability of the operations because higher levels of profit provide the cash to repay their debts.

3. An investment analyst is more concerned about the future growth of the organization. Thus, his objective is to know whether the investment is sound or not. 

4. Management is interested in the company's financial condition, profitability and future possibilities.  The main objective of management in going for an analysis is that such data compel them to view the company in the way important outsiders like, creditors and investors must view it. Sometimes this analysis provides management with valuable clues to important changes in underlying operating investing and financing activities.              

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