Interpretation of the Financial Statements
Financial analysis is an art, and there are probably as
many approaches to analysis of statements as there are analysts. Various persons
or groups will emphasize different relationships, depending upon their economic
interests. Although techniques and data may vary considerably, the financial statements
of the business firm provide the key to understanding the workings. of the firm.
In many cases, management may utilize these techniques profitably in planning and
controlling its own operations, but our viewpoint in this discussion will be primarily
that of the outside creditor and investor.
It is sometimes said that long-term investors and the
professional analysts who advise them are principally interested in a company’s
earning power and as a result frequently concentrate on growth and earnings trends.
Short-term creditors, on the other hand, are said to be interested mainly in repayment
of their Obligations, and hence they look for significant relationships in the working
capital (current) accounts of a firm. In fact, neither description is entirely accurate.
Any creditor or investor who expects to have a continuing economic interest in a
business firm will ordinarily attempt to evaluate both the short- and long-term
measures of financial strength and profitability.