Accounting : financial analysis

The summary documents drawn up from the company's accounts provide information that needs to be analyzed. From this analysis, the reader can draw a number of conclusions about the company's situation and the course of action to take. For example, if you're an investor, you'll decide whether or not to invest in the company's capital; if you're a supplier, you'll decide whether or not to extend payment terms...

This analysis, based on accounting data, is essential. However, it is only one element in the assessment of a company's health, as other elements will also come into play: in particular, its future prospects (accounting remains primarily a reflection of the past, even if, under the influence of IFRS, financial statements take into account certain future events) and the personal situation of the third party making the enquiry (I may, for example, be very interested in buying a company, not because of its economic performance, but rather because of its geographical location, which will enable me to develop my own activities).

The fact that financial analysis of accounting information does not provide certainty, but only suggests behaviour, is one of the reasons for the existence of stock exchanges. Nevertheless, whatever approach one chooses, a sound financial analysis is an essential prerequisite for sound decision-making.