Financial analysis is used to assess economic trends, formulate financial policies, develop long-term company goals, and find potential investment projects or firms. This is accomplished by combining financial numbers with data. A financial analyst will look at a company's financial accounts, including the income statement, balance sheet, and cash flow statement, in detail. Both corporate finance and investment finance can benefit from financial analysis.

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Components of Financial Analysis

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Income statement

An income statement report showcases the profitability of a business over a given period, usually three to twelve months. It can help predict future performance and evaluate the capacity of future cash flow. This is also referred to as the profit and loss statement (P&L), statement of operations, or statement of earnings.

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Balance sheet

This is also known as the statement of financial position. It reports the assets, liabilities, and shareholder equity at a specific period, usually a year. In every balance sheet, assets must equal the total of liabilities and equity, meaning the total of both columns balancing to zero.

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Cash flow statement

A cash flow statement provides information about the amount of cash generated and used by a company during a specific period. Its primary objective is to assess the liquidity and solvency of the firm at a given point in time. By detailing the sources and uses of cash, the statement helps stakeholders understand the company's ability to meet its financial obligations and its potential to manage cash flows effectively in the future.