How to perform an analysis interpretation of financial statements?

The analysis interpretation of financial statements, is a technique that is based on the study of the accounting information of a company related to its financial statements during a certain period of time, to be able to evaluate the behavior of the accounts and thus have a real vision of the economic situation of the company.

This analysis and interpretation of financial statements receives accounting information where various indicators are applied that allow verifying the variance and relationship of the accounts, in order to make an evaluation of the profitability and viability of a company and thus estimate its solvency and the value it generates.

Within this critical process analysis, the financial position of the past and present is evaluated, as well as the results of the operations of the company to establish estimates and predictions that favor the conditions and results futures. It is a fundamental component for the investment and business financing that helps them in making decisions.

Objectives of an analysis interpretation of financial statements

Among the specific objectives that serve to better understand the analysis and interpretation of financial statements and the development of the company's internal activities are:

• Evaluate the profitability of the business as it relates to asset investment, stock value, sales, and equity investment.
• Use the necessary resources in order to analyze the accounts receivable and payable, fixed and total assets, liquidity and inventory activity of the company.
• Understand the instruments that help to compare the different techniques and financial ratios applicable internally in the company.
• Provide employees with the necessary information so that they are aware of the financial situation of the company where they work.
• Detail the measures that have to be considered in decision-making and in the possible solutions of the different problems that may affect the company.
• Help to plan an adequate direction in the investments that the company makes.
• Specify the position that the company has in the competitive market in which it operates.
• Determine the reasons that are used to evaluate the position of the debts of the company and its ability to meet the payment of the same.

Information Needed to Perform Financial Analysis

To perform an analysis of the financial statements, it is very important to take into account the following information:

Business overview

It is important to have complete information about the company, to know how it carries out its productive activity, what are its variants in high and low seasons, from when and to what does it produce, position within the market, to whom it belongs and what strategies it uses to consolidate it.

financial statements

Within these statements should be included, the cash flow, financial situation, changes and equity consolidations, income statements, asset conduct, balance sheet notes and the rotation or asset conduct.

Management annexes

Annexes should understand budget executions, comparative projection management historical and actual executions and also the estimated projection for the validities prosecutors.

How to perform a financial analysis interpreting financial statements

Analysis interpretation of financial statements consists of a variety of techniques and processes, with which a study of accounting information can be carried out that provides an objective result related to the current situation of the company together with the evolution expected in the future.

To know how to analyze and interpret financial statements, it is necessary to properly use the instruments presented below:

• Management ratio: It is the instrument by which the level of activities of the company is evaluated, in the same way it allows to know the efficiency that manages the financial resources of the company.
• Liquidity ratio: It can indicate the capacity of the company to execute its activities in the short term.
• Debt ratio: Through this instrument you can know how it operates, where the financing and the solvency of the company come from.
• Profitability ratio: It allows to know how the company contributes in the management of the remuneration of its own or third-party capital placed in it. You can also know the investment that generates profits and the percentage of sales and thus evaluate how management uses the resources it has.

In addition to the ratios, to perform the analysis of the financial statements it is also necessary to have certain important instruments to analyze the structure and operation of the company, these instruments They are:

• Source of information: The company must provide the information of the report that is being used and what is the analyzed period that was used to make the report.
• Cash flow: With this instrument it is possible to analyze any change that arises in the financial situation.
• Financial background: This type of analysis summarizes the anticipated activity of the company, as well as the objectives of the report.
• Profit and loss accounts: It is an analysis of costs, expenses, structure and evolution of the company's income and allows us to observe how the result of the process develops.
• Balance sheet: Refers to the instrument that shows the structure and evolution of liabilities, assets and equity of the company, allowing in detail the situation of a specific period of the company.

Perform a analysis of financial statements, helps to know important economic information of the company during a specific period of time. in the same way, it collects the elements that comprise the organization's annual accounts to define the financial value it has at that time.

It is important to understand that the well-being of companies is not based only on selling excellent products or services, it is also necessary apply appropriate strategies and have knowledge of the operation and structure of the company, that is why financial analysis has now achieved greater relevance within the business environment.