Role of Financial Analysis

1. Role of Financial Analysis

3. The role of financial analysis in assessing the financial stability of Merger and Acquisition A feature of market relations is fierce competition, computerization of information processing, technological changes, improvements in legislation, inflation. In these conditions, Merger and Acquisition face the problem of rational organization of the financial activities of the enterprise for its further prosperity, increasing the efficiency of financial resource management, and ensuring a stable financial condition. One of the most important characteristics of the financial condition of an enterprise is the stability of its activities from the standpoint of both short-term and long-term perspectives. A financially stable company is one that, at its own expense, covers the funds invested in assets, does not allow unjustified receivables and payables, and pays off its obligations on time. 

5. Thus, financial stability should be understood as such a state of financial resources in which self-financing of reproduction costs and the solvency of an economic entity are ensured. The main thing in financial activity is the correct organization and use of working capital. Therefore, in the process of analyzing the financial condition, great attention is paid to the rational use of working capital. The following factors influence the financial stability of Merger and Acquisition: • The position of the enterprise in the commodity market; • Production of quality products; • Dependence of the enterprise on external investors and creditors; • The presence of insolvent creditors; • The efficiency of business and financial transactions.

7. The characteristics of financial stability include the analysis of: • The composition and placement of assets of an economic entity; • Dynamics and structure of sources of financial resources; • Availability of own circulating assets; • accounts payable; • Availability and structure of working capital; • Accounts receivable; • Solvency. The task of quantitatively assessing the financial stability of an enterprise does not have a unified generally accepted approach to the construction of appropriate assessment algorithms. The indicators included in various Financial Analysis methods can vary significantly, both in quantitative terms and in the calculation method. 

9. The easiest way to explain this is the quite natural presence of analysts' differing priorities and preferences for certain indicators; nevertheless, two reasons can be formulated that, to one degree or another, cause this situation: a) The attitude of Financial Analysis to the necessity and expediency of joint consideration of sources of funds enterprise assets; b) The difference in the interpretation of the role of short-term liabilities. The first reason for the differences in approaches to assessing the financial stability of an enterprise is not significant from the standpoint of the number of indicators, but it is very significant in terms of semantic content. Of course, the coefficients calculated for the liabilities of the balance sheet are the main ones in this block of analysis of the financial condition. 

11. However, the characterization of financial stability using such indicators is unlikely to be complete - it is important not only where the funds were raised from, but also where they invested, what is the structure of investments from the position long-term perspective. The second reason for the difference in approaches is no less significant. Many indicators of this block have different content depending on what sources of funds and in what gradation are selected by the Financial Analysis for evaluation.