What is Financial Analysis and why is it important to understand? Financial analysis is the process of evaluating businesses and / or finance-related transactions to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment.
- If conducted internally, financial analysis can help managers make future business decisions or review historical trends for past successes.
- If conducted externally, financial analysis can help investors choose the best possible investment opportunities.
- There are two main types of financial analysis: fundamental analysis and technical analysis.
- Fundamental analysis uses ratios and financial statement data to determine the intrinsic value of a security.
- Technical analysis assumes a security’s value is already determined by its price, and it focuses instead on trends in value over time.
Some Key Financial metrics are: