Following are the objectives of financial statement analysis from business point of view-
(1) Measuring the profitability : The goal of any business firm is to earn profit. Hence, every firm wants to know the profitability of the organisation as a whole. Financial statement analysis helps to know whether the business is making profits or losses. It also helps to know whether the profits/losses of the firm are increasing or decreasing. It also helps to know the business organisation's ability to pay interest on loans taken and its ability to pay dividend to its shareholders.
(2) To measure the overall financial strength : Financial statement analysis helps to understand the overall financial strength of the business. It also helps to take decisions regarding funds available for purchase of assets, payment of liabilities, etc. It also helps to know whether company's internal sources of funds (retained earnings of past years) are sufficient or a loan would be required.
(3) To know the efficiency of management : Financial statement analysis help to know the efficiency of management in running the business. It helps to know whether financial policies followed by management are proper or not. It also helps to understand whether the management is making optimum utilisation of available resources or not.
(4) To know the trend of business : Financial statement analysis help to know the business trends by comparing various types of data such as net profit, sales, purchases, etc. for two or more years. This helps to know how much the progress business is doing.
The limitations of financial statement analysis are as follows-
(1) Historical in nature : The information provided by the financial statement is historical in nature i.e. it is the past data and does not indicate the future. For example, the value of fixed assets (like Machinery) given in Balance Sheet is based on its cost. It does not represent the market value of such assets
(2) Quantitative in nature : The information provided by financial statement is quantitative (monetary) in nature. It ignores the qualitative (non-monetary) aspects such as working ethics of management, working conditions of labour, etc.
(3) Personal opinion : The financial statements and its conclusions are based on personal decisions. The methods of charging depreciation, method of valuation of inventory etc. depends upon personal opinions. Thus, the reliability of financial statements depends upon ability, honesty and experience of an accountant.
(4) It is a tool and not a solution - Analysis of financial statement is a tool to measure the financial strength and profitability of business organisation. It does not provide any remedy to overcome the problems of business.
(5) Conflict of interest : The financial statements are studied by different stakeholders (parties) for different purposes. It may not meet the requirements of all the stakeholders as their interests are different. For example, shareholders would be interested in knowing dividend paying capacity of the business, creditors would be interested in knowing short term liquidity position of the business, lenders like banks would be more interested in knowing ability of the company to pay interest and principal on time, etc.
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