The financial analysis of companies is essentially undertaken with the aim to assess their performance in light of their objectives and strategies. This allows investors, creditors, suppliers, and other stakeholders to make decisions about those companies. There are two principal tools of financial analysis: ratio analysis and cash flow analysis. The former concentrates on assessing how various line items in a company’s financial statements interact and relate to one another. The goal of the latter is to examine the company’s liquidity and to measure how effective the company is in managing and financing its cash flows.

In general, financial analysis can be performed in two ways: one that compares a company’s current performance to its historical performance (look-back approach), and another that examines its performance against that of its peers (cross-sectional approach). Either way, financial analysis is an indispensible device whereby future performance of companies can be forecasted to serve the needs of various stakeholders.