The concept of financial condition can apply in the generic sense or specifically with respect to businesses. Generically, a financial condition is a status check on the state of any entity's income, expenses, assets and liabilities at a specific point in time. It can be established for a household, a person, a project or any other item or entity that has financial obligations. In a business context, financial condition is an analysis of a company's equity position and profitability at a specific point in time, using financial statements, calculations and ratios.
Businesses keep track of revenue, expenses, assets and liabilities to comply with government regulations, to have substantiation when they pay taxes and to keep shareholders and potential investors informed of the status of operations. This information is kept in an accounting system. The information is pulled out of the system for analysis by generating financial reports. These reports include income statements, balance sheets, cash flow statements and statements of owners' equity and are standardized by the accounting standards boards in each jurisdiction that, in turn, comply with international standards.
Standardized financial statements create a level playing field, so investors can compare the performance of various companies using common instruments. These statements present a company's condition, or the status of its revenue, expenses, assets and liabilities, at a particular point in time. They show financial tallies, such as total revenue and total expenses generated, and present financial conclusions, such as whether a company's cash flow covered operating expenses over a time period.
A company's financial condition is also determined by financial analysts by reviewing financial ratios. These ratios take information from financial statements and use the information in calculations designed to highlight certain financial relationships. For example, information from financial statements is often used to generate a price/earnings ratio. This ratio compares the price of a company's stock to the earnings per share. This type of analysis of a company's financial condition is intended to reveal profitability.
Typically, a review of an organization's condition is a prelude to a quality determination. For example, a company might be in good or bad financial condition, depending upon the state of its financial affairs. This type of determination is made frequently by loan officers, investors, financial analysts and government agencies. The determination can be somewhat subjective, because there is no specific formula for establishing financial condition. Although there are common methods, a reviewer can take other information into account or view ambiguous financial results in a different way.
