Date Posted: 6/20/2014 2:53:08 AM
Posted By: wanjala willies Membership Level: Silver Total Points: 626
Financial and profit analysis is a tool through which a business strength and weakness can be determined through establishing a relationship between items listed on financial statement as well as profit and loss accounts.This financial analysis is one of the greatest and appropriate mechanism under which business viability in the stated industry can be derived.The main purposes among the many reasons of performing financial analysis includes:Establishment of a firm's liquidity ratio. This is a ratio that enhances creditors to a business to be certain that upon establish a credit transaction,a firm will be able to settle the liabilities within a shortest time possible.Establishment of a firms solvency. Solvency is a mechanism in finance that aids to depict a going concern principle. At such long term creditors will be much interested in such a ratio. This will built their confidence in supplying a firm with raw materials for long term basis. Upon doubt, suppliers should not risk their resources in such a business but should bar as the firm's profitability is at compromising note and chances of repaying principal and interest is not guaranteed.Establishment of a firm's earning. This is ideal to investors as they are much interested to determining whether a business earning will diminish or flourish in future. The basis is through analyzing the firm's current and past performance,no shareholder will wish to incur a loss in due course.Managerial strength. No investor will wish to invest in a business where the executive team is not entity oriented. Through gradual systematic up grading in performance,an investor will wish to associate with such a business entity,for instance Safaricom's CEO whose performance is a thing to admire in telecommunication industry.Tax compliance. For any legal profit making organization,taxation should not be compromised. Through financial statement analysis,PAT can be identified and re calculated to ascertain its viability. This acts as a measure under which tax evasion can be minimized. As it were,the government revue will flourish.Finally,the process is ideal in establishing competition levels in the industry, for all shortlisted companies in stock exchange market. It will be critical for a firm to evaluate its position compared to other companies in the same sector to know whether they are leading of following.Financial and profitability analysis should thus be given consideration in business sector.
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