What is "financial analysis"?

Financial analysis is fundamentally the evaluation of a company's financial statements to gauge its performance and financial health. This process involves examining various reports, including the income statement, balance sheet, and cash flow statement, to derive insights into profitability, liquidity, solvency, and operational efficiency. By scrutinizing these statements, analysts can assess key ratios like return on equity, debt-to-equity, and current ratios, which provide a clearer picture of the company's financial situation.

Understanding financial analysis is crucial for stakeholders, including management, investors, and lenders, as it helps them make informed decisions regarding investments, lending, and strategic planning. Evaluating financial statements also allows for benchmarking against industry standards and competitors, helping to identify strengths and weaknesses.

The other choices highlight important aspects of business operations, but are not the essence of financial analysis. Budgeting and financial planning focus on forecasting future financial performance and managing current resources effectively. Inspecting physical assets pertains more to operations and asset management, while studying economic trends involves macroeconomic analysis that influences market conditions but does not directly assess a company’s financial statements.