Without interpretation, analysis is meaningless, and without interpretation, interpretation is challenging or even impossible. Financial analysis is the act of correctly creating linkages between the various elements of the profit and loss account and the balance sheet in order to discover the firm's financial weaknesses and strengths. Management of the company may conduct financial analysis, or parties outside the company, such as owners, trade creditors, lenders, investors, labor unions, analysts, and others, may do so. Depending on the analyst's goal, the type of analysis will vary. Because the interests of the analysts varied, a strategy that one analyst uses regularly may not always be useful to other analysts. For many users, financial analysis is significant and beneficial in the following ways:
Finance manager: Financial analysis places a strong emphasis on the data and connections relating to managerial effectiveness, organizational effectiveness, financial strengths and weaknesses, and company creditworthiness. For the sake of the company, a financial manager must be well-versed in a variety of analytical tools. The analysis tools assist in examining accounting data to assess the viability of operating strategies, the investment potential of the company, credit ratings, and operational effectiveness.
Top management: The role of the finance manager is not the only one to benefit from financial analysis. The other functional managers and top management in general are included in its wide range of important stakeholders. Every part of the financial analysis would be of interest to the company's management. They have a general duty to ensure that the company's resources are utilized as effectively as possible and that its financial standing is stable. Financial analysis assists management in gauging the effectiveness of the business' operations, assessing employee performance, and assessing the internal control system.
Trade creditors: A trade creditor determines, by a review of financial documents, not only whether a company can immediately pay its debts, but also whether there is a good chance that it will continue to be able to do so in the future. Trade creditors are concerned about the company's capacity to pay their debts quickly. Therefore, they will limit their investigation to assessing the firm's liquidity position.