What is the main purpose of financial statement analysis?

The main purpose of financial statement analysis is to assess the financial health and performance of a business over time. This type of analysis allows stakeholders—such as managers, investors, and creditors—to interpret key financial data presented in financial statements like the income statement, balance sheet, and cash flow statement. By examining this information, analysts can evaluate trends, measure profitability, and discern the overall stability of the business. This understanding is critical for making informed decisions regarding investments, lending, or operational improvements within the company.

While preparing tax returns, comparing performance with competitors, and creating budgets for future financial planning are important functions within the realm of accounting and finance, they do not encapsulate the primary goal of analyzing financial statements. Those activities can indeed benefit from insights derived from financial analysis, but they represent specific applications rather than the overall objective of the analysis itself.