FINANCIAL STATEMENT ANALYSIS
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Financial Statement Analysis is using financial statments for decision making. Decisions related to customers (whether to extend credit or not), decisions related to suppliers, decisions related to banking relationships, decisions related to short term investment decisions and decisions related to long term investment like mergers, aquisitions and joint ventures can be done using fiancial statement analysis.
Various ratios involving the information given in the profit and loss account and balance sheets are calculated and certain implications are drawn from them regarding the company. Judgments regarding liquidity (whether company can pay back short term loans or payments due) and solvency (whether the company’s assets are higher than liabilities) are done using ratios.
These ratios are used as inputs various decision models and decisions are taken. Graham-Rao method illustrates a decision model that uses information and ratios from financial statements of company to decide whether to buy shares of the company for long-term buy and hold investment or not.
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