The analysis of the financial statements and projections gives financial information to both internal and external users. They can be used to establish a minimum interval for which a company can internally evaluate the operating performance and the financial position to the creditors. This helps the creditors to evaluate the strengths and weaknesses of the company. The company that shows a positive performance is in a better position to exploit sources to finance the new ventures. The financial analysis shows the ability of the company to pay expenses and debts that are almost due, which increases the chances of getting external sources to finance new ventures. It means that the company is solvent and can easily meet its obligations after receiving the finance sources.
The company, which has less long-term obligations, means an additional long-term loan cannot be a burden to it, therefore creditors can confidently finance the company. This is so because in terms of solvency, the company is performing well, and can receive loans to finance its new projects (Maynard, 2013). Similarly, the analysis of financial statements helps the investors to evaluate the strength of the company because they can finance the ventures of the companies that are profitable.
Projection analysis is important in finding a pattern that can be used to predict the future about the stock and sales in a certain organization. In case the company demonstrates positive sales projections, it can attract investors who can a source of finances for new ventures. This is so because the sales projections show the ability of the company to manage its productivity. The projection analysis is helpful in determining the long-term survival of the company in the market, which is a good indication to creditors and investors.
The liquidity and solvency are terms used to demonstrate the company’s state of financial stability. Thus, they should be used to increase short-term and long-term financing. Solvency ratios show the ability of accompany to meet its dues when they fall due. It measures the ability of the company to pay expenses and debts that are almost due (Needles and Powers, 2011). The examples of solvency ratios include debt to equity, debt to assets and interest coverage ratio among others. These solvency ratios ensure shareholders are comfortable with the performance because they show that the company and not the debtors should own most of the assets. On the other hand, liquidity ratios compare current assets to current liabilities. Companies that are unable to pay their debts can become insolvent and even bankrupt. The types of liquidity ratios include current ratios, acid-test ratio and day’s sales outstanding among others. In order to raise short-term and long-term financing, companies should invest their cash well to meet obligations.
The ratio analysis helps to predict whether the company is likely to face a bankruptcy in the near future. All ratios are important because different users for different rationale use them. They use the ratio analysis to evaluate the profitability and performance of the company in the market. However, the ratio analysis is based on historical data that was kept by the company, but the most important information is the future trend. The available data may not effectively predict the future of the companies, hence the information may not be enough to enable investors to make their investment decisions (Nikolai, Bazley and Jones, 2010). Therefore, more information is needed to make informed decisions.
References
Maynard, J. (2013). Financial accounting, reporting, and analysis. Oxford: Oxford University Press.
Needles, B. E., & Powers, M. (2011). Principles of financial accounting. Australia: South- Western Cengage Learning.
Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2010). Intermediate accounting. Australia: South- Western/Cengage Learning.
