Analysis of individual items on the balance sheet with the goal of evaluating a company’s economic situation
Balance-sheet analysis can be subdivided into internal and external analysis. Internal balance-sheet analysis generates information on the company for the management staff, and is part of corporate controlling operations. In external balance-sheet analysis, outside persons or institutions examine key ratios, as well as the published financial statements and accounts prepared for tax purposes, in order to ascertain the company’s earning power, creditworthiness, and profitability. However, the findings of external balance-sheet analysis cannot be regarded as completely valid, because information on unused credit lines, outstanding contracts or undisclosed reserves can be concealed in the balance sheet by calculating higher depreciation expenses.
Balance-sheet analysis is the most important component of fundamental analysis.
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