CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDYFinancial analysis is the process of reviewing and analyzing company’s financial statement to make better economic decision. These statements include the income statement, consolidation statement of financial position, statement of cash flow, and statement of profit or loss and other comprehensive income. Financial statement analysis is a method or process involving specific techniques for evaluating risks, performance, financial health and future prospects of an organization. It is used by a variety of stakeholders, such as credit and equity investors, the government, the public and decision-makers within the organization. These stakeholders have different interest and apply a variety of different techniques to meet their needs.

Financial analysis involves analyzing the financial problems that the company faces and deciding which course of action should be taken. In order to make financial decision, one must be able to identify potential financial problems and analyze the effect of alternative cost of action. Financial analysis for a company depends on its perceived needs and the types of decisions its management makes. Companies needs differ, but the area of financial long-range planning, profit planning and budgeting capital investment, decision, operational auditing, mergers and acquisitions, and the administration of temporary corporate investments.

The financial analysis is to increase the owner’s wealth. The way to increase the owner’s wealth is to increase the market value of their investment (equity) in the enterprise. Financial analysis are used to help improve the value of a company frequently, they are also sensitive. There are many project that financial analyst must perform periodically. These activities include analyzing the company’s liquidity, performing operational audits and supervising the company day-to-day financial activities. In addition, the analyst has annual or semiannual duties, including conducting a sales analysis, analyzing the company’s debt structure, developing the financial statement and ratio analysis and analyzing investment of liquid reserves.