Short definition: Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-related entities to determine their performance and suitability.
Explanation: It involves examining financial data, such as financial statements, to assess a company’s profitability, solvency, liquidity, and overall financial health. Financial analysis can be used for various purposes, including investment decision-making, credit analysis, and performance evaluation.
Example: A financial analyst might conduct a financial analysis of a company to determine its creditworthiness before granting a loan. They would examine the company’s balance sheet, income statement, and cash flow statement to assess its ability to repay the loan.
Additional information (optional): Financial analysis uses various tools and techniques, such as ratio analysis, trend analysis, and comparative analysis. It helps stakeholders make informed decisions about investments, lending, and business operations.