What is the primary goal of financial analysis?

The primary goal of financial analysis is to evaluate a company's financial performance and position. This process involves examining a company's financial statements, such as the income statement, balance sheet, and cash flow statement, to assess its profitability, liquidity, solvency, and overall health. Financial analysis helps stakeholders—including management, investors, creditors, and regulators—gain insights into how well the organization is performing compared to its peers, its ability to generate profit, and its financial stability.

By analyzing various financial ratios and metrics, decision-makers can identify strengths and weaknesses within a company's operations, inform strategy development, and make more informed decisions regarding investments, credit extensions, and other financial matters. This comprehensive understanding is critical for long-term planning and resource allocation.

In contrast, preparing future budgets based on historical data, determining employee compensation packages, and predicting market trends are related tasks but do not encapsulate the overarching purpose of financial analysis itself. Financial analysis is more focused on the actual evaluation of financial information to derive insights about current performance and future capabilities.