PURPOSE OF FINANCIAL STATEMENT ANALYSIS
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Financial statements analysis includes all the tools and techniques used by users of financial statements to explain the major relationships in the financial statements. There are mainly two users of financial statements viz., external users and internal users. The main internal user is the management while the external users are creditors and investors. Investors want a reasonable return on their investment and a reasonable increase in their stake value. While creditors require assurance as to the return on their investment. Both have risk. So both always think to achieve a good return on their risk. Creditors and investors always try to invest in those groups of loans and investments, which allow them to average both the returns and the risk. Thus, for taking the decision to invest in these groups creditors and investors mostly use financial statement analysis. Therefore, creditors and investors use financial statement analysis to judge -
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past performance and current position; and
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future potential risk i.e., prospective for the future.
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