Financial Analysis

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DEFINITION of 'Financial Analysis'

The process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flow statement. In addition, one key area of financial analysis involves extrapolating the company's past performance into an estimate of the company's future performance.

INVESTOPEDIA EXPLAINS 'Financial Analysis'

One of the most common ways of analyzing financial data is to calculate ratios from the data to compare against those of other companies or against the company's own historical performance. For example, return on assets is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several similar companies and compared as part of a larger analysis.

RELATED TERMS
  1. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  2. Cash Flow Statement

    One of the quarterly financial reports any publicly traded company ...
  3. Return On Assets - ROA

    An indicator of how profitable a company is relative to its total ...
  4. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly ...
  5. Income Statement

    A financial statement that measures a company's financial performance ...
  6. Risk

    The chance that an investment's actual return will be different ...
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