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

Marginal Benefit
What Is a Marginal Benefit in Economics, and How Does It Work?
Operating Activities
What Are Operating Activities, and What Are Some Examples?
Positive Correlation: What It Is, How to Measure It, Examples
Present Value Interest Factor (PVIF)
Present Value Interest Factor (PVIF): Formula and Definition
Return on Net Assets (RONA)
Return on Net Assets (RONA): Definition, Formula, Example
Simple Random Sampling: 6 Basic Steps With Examples
Sustained Growth Rate (SGR)
Sustained Growth Rate (SGR): Definition, Meaning, and Limitations
Systematic Sampling: What Is It, and How Is It Used in Research?
Stratified Random Sampling Definition
How Stratified Random Sampling Works, with Examples
Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office
What Is Valuation?
Accretion: Definition in Finance and Accounting
Bayes' Theorem: What It Is, the Formula, and Examples
Capitalization (Cap) Table
Capitalization (Cap) Table: What It Is, Creating/Maintaining One
Close-up of a man's hand touching a stock market chart on a tablet
Central Limit Theorem (CLT): Definition and Key Characteristics
Midsection of Businessman Using Calculator and Laptop at Desk
Coefficient of Determination
Illustration of wave particles
Co-efficient of Variation Meaning and How to Use It
Comps
Comps: Definition, How They're Used in Analysis, and Example
School children in uniforms standing on painted Venn Diagrams
The Correlation Coefficient: What It Is, What It Tells Investors
Heteroscedasticity
Heteroscedasticity Definition: Simple Meaning and Types Explained
High-Low Method
High-Low Method Definition
Joint Probability
Joint Probability: Definition, Formula, and Example
Linear Relationship Definition
digital finance and stock market graph on a plane with light circles
Monte Carlo Simulation: History, How it Works, and 4 Key Steps
Mutually Exclusive
Mutually Exclusive: What It Means, With Examples
Nonparametric Statistics
Nonparametric Statistics: Overview, Types, and Examples
P-Value
P-Value: What It Is, How to Calculate It, and Why It Matters
Business market share.
Pro Rata: What It Means and the Formula to Calculate It
R-Squared
R-Squared Formula, Regression, and Interpretations
Sampling Errors in Statistics: Definition, Types, and Calculation
Statistical Significance
Statistical Significance Definition: Types and How It's Calculated
Statistical Significance: What It Is, How It Works, With Examples
Sum of Squares
Close-Up Of Green Liquid Pouring From Pipette In Test Tubes
Type II Error Explained, Plus Example & vs. Type I Error
Variability of ECG
Variability
Investors Need a Good WACC
Investment
Disadvantages of Net Present Value (NPV) for Investments
Liquidity Risk
Understanding Liquidity Risk in Banks and Business, With Examples
What Is a Momentum Indicator? Definition and Common Indicators
Accountant working at computer with graphs and charts
A Clear Look at EBITDA
Internal Rate of Return: An Inside Look
Investor Checking Performance of Financial Portfolio Online Whilst Reviewing Investment Statement
Analyzing a Company's Capital Structure
How to Efficiently Read an Annual Report
Valuing a Company Using the Residual Income Method
Breaking Down the Geometric Mean in Investing
midtown manhattan skyline view
Spin-Off vs. Split-Off vs. Carve-Out: What's the difference?
Earnings Per Share (EPS) vs. Dividends Per Share (DPS): What's the Difference?
Deferred Revenue vs. Accrued Expense: What's the Difference?
The Formula for Calculating the Internal Rate of Return
Operating Leverage Versus Financial Leverage: What's the Difference?
Par Value vs. Market Value: What's the Difference?
Limitations of Using a Payback Period for Analysis
Financial Traders With Screens
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
After-Tax Real Rate of Return
After-Tax Real Rate of Return Definition and How to Calculate It
man counting inventory in a warehouse on a tablet
Average Inventory
Statistic results with a pen on the paper
Capital Employed: Calculation, How to Use It to Determine Return
Days Working Capital
Days Working Capital: Definition, Calculation, and Example
Distribution Yield
Distribution Yield: Definition, What It Measures, and Calculation
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