Financial analysis may be defined as the process of obtaining relevant economic information about a project in order 10 establish its financial viability It is undertaken as one of the feasibility analyses in project formulation. Most of the data required for financial analysis are obtained from market analysis, technical analysis and cost analysis. In order to develop adequate financial information, financial analysis looks at the projected capital cost estimates, projected operating cost estimates and operating revenue estimates. The information collected for the purpose are printed in the form of Performa balance sheet, Performa operating statement and cash flow statement
Financial analysis primarily deals with the interpretation of the financial data incorporated in the Performa financial statements and the presentation of the economic facts in such a form s to make &comparative evaluation I appraisal of projects. In other words, it is mainly concerned with the development of financial profile of the project. Financial analysis deals not only with the financial aspects of a project but also with its operational aspects. Its main purpose is to establish whether the project would enable to achieve the objectives for which it is undertaken. For easy and better comparison and explanation, ratio analysis is used. Through the-ratios the relationship between various financial factors of a project is explained and their trend forecasts are developed.
In order to complete the financial profile of a project, it is also necessary to evaluate the operational strategy and the investment strategy of the project. The break-even analysis is used to explain the operational characteristics of a project. Financial strategy is evaluated in terms of financial leverage, i.e., debt-equity mix and its effect on financial returns from the project. Theoretically different types of capital structure are available-and the ultimate objective is to choose an ideal capital structure, i.e., financing mix. Investment strategy is evaluated in terms of investment criteria such as JRR, NPV, etc. These project selection criteria depict the net contribution of the project towards the improvement of the economic position of the project implementing body.