Financial analysis is used to ascertain the investment value of a business, stock or other asset. Income, balance, and cash flow statements are typically used to extract ratios that divulge information such as solvency, price to earnings and return on equity. Their function is to paint a current picture of the asset that can then be compared to similar businesses or predict future performance based on past performance.

Income, Balance and Cash Flow Statements

Financial statements show a plethora of information about a company that can be used to determine investment worthiness. The income statement shows revenue and profit including tax information. The balance sheet lists assets and liabilities revealing debt to equity, a vital ratio for solvency and ability to pay on a company's loans. The cash flow statement reveals liquidity and how a businesses money is allocated.

Ratio Analysis

Ratios break down financial statements into a mathematical blueprint that discloses information such as price to earnings, return on assets and numerous other relationships. Formulas show comparative performance to correlative companies and can be used to determine relative value. They are invaluable for figuring out how a company operates in regards to its cash flow, expenditures and investment philosophy.

Future Performance

The idea of financial analysis is to determine whether or not a particular asset will increase in value over time. Predicting future performance is simplified by analyzing past ratios and carrying those themes several years forward. Indications of improving revenues, lower debt and higher returns on equity are confirmed by a companies own financial statements over time. Armed with this knowledge, an investor can make a reasonable judgment on how a business will continue to perform.


Financial analysis can provide an investor a wealth of information about a company. Knowing how ratios relate to each other and what they may mean for the future are key determinants in figuring out if a business is currently thriving and if it will continue to do so into the future. Financial statements are essential in order to find this information and the knowledge they contain pave the way for investors to do their own due diligence.