• Analytical Tool: Financial statement analysis involves the application of tools and techniques to general purpose financial statements and other data and information available in the annual reports in order to derive information useful for decision-making. Investors, creditors and others armed with the knowledge of financial reporting system and the analytical tools and techniques are better equipped to make informed investment decisions. Employees analyze financial statement to improve their bargaining position. Creditors analyze financial statements to assess the probability of loan repayment.

• Forecasting Tool: Financial statement analysis is used as a tool to forecasting. Forecasting implies prediction of future. Forecasting can be for future earnings, ability to pay interest and debt maturities and profitability of a sound dividend policy. Using various techniques and tools, the analysts determine the characteristics of the firm and its historical trends. With this background in mind, they prepare projected financial statements. In forecasting earnings, analysts do not restrict to analysis of financial statements alone, but also assess the competitive environment and forecast economic and other factors.

• Diagnostic Tool: Financial Statement Analysis can be used as a diagnostic tool. It can be used to diagnose the strengths and weaknesses of a firm by assessing the profitability, and the financial soundness of the company. Financial statement analysis is often used to identify the weaknesses in the procedures, and management systems in the organization.

• Evaluation Tool: Financial statement analysis can be used to evaluate the profitability and the performance of the company. One can use the financial statements to evaluate the growth prospects of the company, the future of the company, the technological and innovative potential, management capability, etc. Merger and acquisitions specialists continually search for undervalued companies - firms whose true worth exceeds their market price. Financial statement analysis assists these analysts in determining whether the companies are worth combining. By making several adjustments to the financial statement they value the firm under consideration. Credit Analysts evaluate the financial disclosures to determine the debt service capability of the firm.

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