Financial management analysis is an integral part of interpretations of results disclosed by financial statements. It supplies to decision makers crucial financial information and points out the problem areas which can be investigated financial statement analysis involves regrouping of the data suitably by arithmetic operations. Financial statements may be analyzed with a view to achieve the following purposes:
1) Profitability analysis: Users of financial statements may analyze financial statements to decide past and present profitability of the business. Prospective investors may do profitability analysis before taking a decision to invest in the shares of the company.
2) Liquidity analysis: Suppliers of goods moneylenders and financial institutions may do liquidity analysis to find out ability of the company to meet its obligations. Liquid assets are compared with the commitments in order to test liquidity position of a company.
3) Solvency analysis: It refers to analysis of long term financial position of a company. This analysis helps to the ability of a company to repay its debts. For this purpose, financial structure, interest coverage is analyzed.