What is the primary purpose of financial statement analysis?

The primary purpose of financial statement analysis is to assess financial health and performance. This type of analysis involves evaluating a company's financial statements—such as the income statement, balance sheet, and cash flow statement—to gain insights into its profitability, liquidity, solvency, and overall financial stability. By analyzing these documents, stakeholders, including investors, creditors, and management, can make informed decisions regarding the company's financial condition and operational efficiency.

Assessing financial health encompasses understanding various metrics, such as profitability ratios, liquidity ratios, and leverage ratios, which highlight how well the company can generate profits, meet short-term obligations, and manage debt. The insights gained from this analysis can help stakeholders determine the organization's potential for future growth, identify areas that need improvement, and strategize accordingly.

While preparing tax returns, determining credit risk, and forecasting future sales are important functions in their own right, they are not the primary focus of financial statement analysis. Tax preparation is about compliance and tax liabilities, assessing credit risk centers on evaluating the creditworthiness of the business, and forecasting future sales involves predicting revenues, which requires additional data beyond financial statements. All of these functions may utilize insights gained from financial statement analysis, but the core purpose remains the evaluation of financial health and performance.