How do you know whether a business or project is likely to make for a successful investment? Financial analysis is the key to determining the viability and potential profitability of any venture.

Frequently Asked Questions
  • What are the components of financial analysis?

    When it comes to financial analysis, the most important things to assess are a company’s four main financial statements: the balance sheet, the income statement, the cash flow statement, and the statement of shareholder’s equity. Taken together, these statements can tell you the source of a business’ money, how it was used, and where it was allocated. Each of these financial statements also consists of multiple smaller components, including a company’s assets, earnings per share, and cash inflows/outflows, that can provide further insight into a business's financial health.

  • What is an example of financial analysis?

    As an example, let’s say Company A reported its first quarter 2022 earnings per share (EPS) at $4.21, while Company B reported EPS of $3.96 for the same quarter. When comparing these two figures, Company A seems like a financially healthier business; however, let’s also say Company A’s EPS was $5.04 in the prior quarter, while Company B’s was $2.83. Given that Company B’s EPS rose by almost 40%, whereas Company A’s fell by nearly 16.5%, we can infer that the intrinsic value of the former business is currently growing. EPS is just one of the pieces of information taken into account when financial analysts make their forecast of a company's possible future performance and stock price.

  • What are the benefits of financial analysis?

    Financial analysis is a crucial practice for business owners and upper management, as it enables them to better monitor the state of their businesses and identify areas for improvement. It is also an incredibly useful tool in an investor’s arsenal for comparing the performances of different public companies over time. Analyzing how businesses differ based on their revenue or earnings per share (EPS) growth can take some of the guesswork out of making a stock purchase.

  • What are the top skills for a financial analyst?

    Outside of essential knowledge like accounting and financial literacy, a basic yet crucial skill that all financial analysts should have is proficiency in the use and organization of spreadsheets, databases, and presentation software. Other useful skills include leadership and management skills, especially for analysts responsible for departments or teams, as well as more advanced technical skills for using accounting and bookkeeping software. As in any business, personal and communication skills are also a must in order to establish good interpersonal relationships with coworkers, clients, and other industry connections.

Key Terms

Explore Financial Analysis

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Understanding Linear Relationships
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What Does "Mutually Exclusive" Mean?
How Nonparametric Statistics Work
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P-Value: What It Is, How to Calculate It, and Why It Matters
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Pro Rata: What It Means and the Formula to Calculate It
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R-Squared Formula, Regression, and Interpretations
Sampling Error
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Sum of Squares
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Variability Definition
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Investment
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Learn About Liquidity Risk With Investments
Understanding Momentum Indicators and RSI
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A Clear Look at EBITDA
Using Internal Rate of Return in Everyday Life
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Analyzing a Company's Capital Structure
How to Efficiently Read an Annual Report
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Spin-Off vs. Split-Off vs. Carve-Out: What's the difference?
Earnings Per Share vs. Dividends Per Share: What's the Difference?
Deferred Revenue vs. Accrued Expense: What's the Difference?
The Formula for Calculating the Internal Rate of Return
The Difference Between Operating Leverage and Financial Leverage
Par Value vs. Market Value: What's the Difference?
Limitations of Using a Payback Period for Analysis
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Profits vs. Earnings: What’s the Difference?
Enterprise Value vs. Market Capitalization: What's the Difference?
How ROA and ROE Give a Clear Picture of Corporate Health
Understanding Capital and Financial Accounts in the Balance of Payments
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After-Tax Real Rate of Return
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Average Inventory
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Learn What Capital Employed Is
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Page Sources
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  1. U.S. Securities and Exchange Commission. "Beginners' Guide to Financial Statement." URL: https://www.sec.gov/reportspubs/investor-publications/investorpubsbegfinstmtguidehtm.html