FINANCIAL PERFORMANCE ANALYSIS
Financial Performance
The word ‘Performance is derived from the word ‘parfourmen’, which means ‘to do’, ‘to carry out’
or ‘to render’. It refers the act of performing; execution, accomplishment, fulfillment, etc. In border
sense, performance refers to the accomplishment of a given task measured against preset standards
of accuracy, completeness, cost, and speed. In other words, it refers to the degree to which an
achievement is being or has been accomplished. In the words of Frich Kohlar “The performance is a
general term applied to a part or to all the conducts of activities of an organization over a period of time
often with reference to past or projected cost efficiency, management responsibility or accountability
or the like. Thus, not just the presentation, but the quality of results achieved refers to the performance.
Performance is used to indicate firm’s success, conditions, and compliance.
Financial performance refers to the act of performing financial activity. In broader sense, financial
performance refers to the degree to which financial objectives being or has been accomplished. It is
the process of measuring the results of a firm’s policies and operations in monetary terms. It is used to
measure firm’s overall financial health over a given period of time and can also be used to compare
similar firms across the same industry or to compare industries or sectors in aggregation.
Financial Performance Analysis
Financial performance analysis is the process of identifying the financial strengths and weaknesses of
the firm by properly establishing the relationship between the items of balance sheet and profit and
loss account. It also helps in short-term and long term forecasting and growth can be identified with the
help of financial performance analysis. The dictionary meaning of ‘analysis’ is to resolve or separate
a thing in to its element or components parts for tracing their relation to the things as whole and to
each other. The analysis of financial statement is a process of evaluating the relationship between the
component parts of financial statement to obtain a better understanding of the firm’s position and
performance. This analysis can be undertaken by management of the firm or by parties outside the
namely, owners, creditors, investors.
In short, the firm itself as well as various interested groups such as managers, shareholders, creditors, tax
authorities, and others seeks answers to the following important questions:
1. What is the financial position of the firm at a given point of time?
2. How is the Financial Performance of the firm over a given period of time?
These questions can be answered with the help of financial analysis of a firm. Financial analysis involves
the use of financial statements. A financial statement is an organized collection of data according
to logical and consistent accounting procedures. Its purpose is to convey an understanding of some
financial aspects of a business firm. It may show a position at a moment of time as in the case of a
Balance Sheet, or may reveal a series of activities over a given period of time, as in the case of an
Income Statement. Thus, the term ‘financial statements’ generally refers to two basic statements: the
Balance Sheet and the Income Statement.
The Balance Sheet shows the financial position (condition) of the firm at a given point of time. It provides
a snapshot and may be regarded as a static picture.
“Balance sheet is a summary of a firm’s financial position on a given date that shows Total assets = Total
liabilities + Owner’s equity.”
The Income Statement (referred to in India as the profit and loss statement) reflects the performance of
the firm over a period of time. “Income statement is a summary of a firm’s revenues and expenses over
a specified period, ending with net income or loss for the period.”
However, financial statements do not reveal all the information related to the financial operations
of a firm, but they furnish some extremely useful information, which highlights two important factors
profitability and financial soundness. Thus analysis of financial statements is an important aid to financial
performance analysis. Financial performance analysis includes analysis and interpretation of financial
statements in such a way that it undertakes full diagnosis of the profitability and financial soundness of
the business.
“The analysis of financial statements is a process of evaluating the relationship between component
parts of financial statements to obtain a better understanding of the firm’s position and performance.
The financial performance analysis identifies the financial strengths and weaknesses of the firm by
properly establishing relationships between the items of the balance sheet and profit and loss account.
The first task is to select the information relevant to the decision under consideration from the total
information contained in the financial statements. The second is to arrange the information in a way to
highlight significant relationships. The final is interpretation and drawing of inferences and conclusions.
In short, “financial performance analysis is the process of selection, relation, and evaluation.” 9
Financial Performance
The word ‘Performance is derived from the word ‘parfourmen’, which means ‘to do’, ‘to carry out’
or ‘to render’. It refers the act of performing; execution, accomplishment, fulfillment, etc. In border
sense, performance refers to the accomplishment of a given task measured against preset standards
of accuracy, completeness, cost, and speed. In other words, it refers to the degree to which an
achievement is being or has been accomplished. In the words of Frich Kohlar “The performance is a
general term applied to a part or to all the conducts of activities of an organization over a period of time
often with reference to past or projected cost efficiency, management responsibility or accountability
or the like. Thus, not just the presentation, but the quality of results achieved refers to the performance.
Performance is used to indicate firm’s success, conditions, and compliance.
Financial performance refers to the act of performing financial activity. In broader sense, financial
performance refers to the degree to which financial objectives being or has been accomplished. It is
the process of measuring the results of a firm’s policies and operations in monetary terms. It is used to
measure firm’s overall financial health over a given period of time and can also be used to compare
similar firms across the same industry or to compare industries or sectors in aggregation.
Financial Performance Analysis
Financial performance analysis is the process of identifying the financial strengths and weaknesses of
the firm by properly establishing the relationship between the items of balance sheet and profit and
loss account. It also helps in short-term and long term forecasting and growth can be identified with the
help of financial performance analysis. The dictionary meaning of ‘analysis’ is to resolve or separate
a thing in to its element or components parts for tracing their relation to the things as whole and to
each other. The analysis of financial statement is a process of evaluating the relationship between the
component parts of financial statement to obtain a better understanding of the firm’s position and
performance. This analysis can be undertaken by management of the firm or by parties outside the
namely, owners, creditors, investors.
In short, the firm itself as well as various interested groups such as managers, shareholders, creditors, tax
authorities, and others seeks answers to the following important questions:
1. What is the financial position of the firm at a given point of time?
2. How is the Financial Performance of the firm over a given period of time?
These questions can be answered with the help of financial analysis of a firm. Financial analysis involves
the use of financial statements. A financial statement is an organized collection of data according
to logical and consistent accounting procedures. Its purpose is to convey an understanding of some
financial aspects of a business firm. It may show a position at a moment of time as in the case of a
Balance Sheet, or may reveal a series of activities over a given period of time, as in the case of an
Income Statement. Thus, the term ‘financial statements’ generally refers to two basic statements: the
Balance Sheet and the Income Statement.
The Balance Sheet shows the financial position (condition) of the firm at a given point of time. It provides
a snapshot and may be regarded as a static picture.
“Balance sheet is a summary of a firm’s financial position on a given date that shows Total assets = Total
liabilities + Owner’s equity.”
The Income Statement (referred to in India as the profit and loss statement) reflects the performance of
the firm over a period of time. “Income statement is a summary of a firm’s revenues and expenses over
a specified period, ending with net income or loss for the period.”
However, financial statements do not reveal all the information related to the financial operations
of a firm, but they furnish some extremely useful information, which highlights two important factors
profitability and financial soundness. Thus analysis of financial statements is an important aid to financial
performance analysis. Financial performance analysis includes analysis and interpretation of financial
statements in such a way that it undertakes full diagnosis of the profitability and financial soundness of
the business.
“The analysis of financial statements is a process of evaluating the relationship between component
parts of financial statements to obtain a better understanding of the firm’s position and performance.
The financial performance analysis identifies the financial strengths and weaknesses of the firm by
properly establishing relationships between the items of the balance sheet and profit and loss account.
The first task is to select the information relevant to the decision under consideration from the total
information contained in the financial statements. The second is to arrange the information in a way to
highlight significant relationships. The final is interpretation and drawing of inferences and conclusions.
In short, “financial performance analysis is the process of selection, relation, and evaluation.” 9
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