"Analysis of financial statements refers to the method of determining the significant operating and financial characteristics from the accounting data with a view to getting an insight into the activities of an enterprise."

While the analysis implies generalization of the data by logical arrangement of information given in the financial statement. However, analysis is blind without interpretation, and interpretation becomes difficult without analysis. Interpretation means elaborating the meaning and significance of the data so simplified. So analysis and interpretation means attempt to determine the significance and meaning of the financial statement data so that a judgment may be made of the prospects for future earnings, ability to pay interest, debt maturities, both current as well as long term, and profitability of sound dividend policy.