INTERPRETATIONS IN PUBLISHED ACCOUNTS

Interpretations in published accounts

Interpretations in published accounts

Introduction

The accounting information, market information and aggregate base economic data are key inputs required for financial analysis and planning, statistical methods, regression analysis, operations research programming techniques and computer programming skills are important tools for the achievement of financial planning and forecasting. In fiscal financial analysis and planning, it is important to know how to use the right tools in the analysis of relevant data.

Static-Value analysis and its extension

To make use of the financial statements, an analyst needs some kind measure for analysis. Often, relationships are used to relate a piece of other financial information. The relationship puts the two pieces of data in an equivalent basis, which increases the usefulness of the data. For example, net income as an absolute number is meaningless to make comparisons between companies of different sizes. If you create a ratio of net profitability (NI / Sales), however, comparisons are made easier. Analysis of a number of reasons that give us a clear picture of the company's financial situation and performance. Analysis of the relationship may take one of two ways. First, the analyst can ratios compare a company with similar business or industry average at a specific point in time.

Static Determination of Financial Ratios

The static determination of financial ratios involves the calculation and analysis of ratios over a number of periods for one company, or the analysis of differences in ratios among individual firms in one industry. An analyst must be careful of extreme values in either direction because of the interrelationships between ratios. For instance, a very high liquidity ratio is costly to maintain, causing profitability ratios to be lower than they need to be. Furthermore, ratios must be interpreted in relation to the raw data from which they are calculated, particularly for ratios that sum accounts in order to arrive at the necessary data for the calculation. Even though this analysis must be performed with extreme caution, it can yield important conclusions in the analysis for a particular company.

Liquidity Ratios

Liquidity ratios are calculated from the information on the balance sheet; they measure the relative strength of a firm's financial position. Crudely interpreted, these are coverage ratios that indicate the firm's ability to meet short-term obligations. The current ratio (ratio (1) in Table 2.5) is the most popular of the liquidity ratios because it is easy to calculate and it has intuitive appeal. It is also the most broadly defined liquidity ratio, as it does not take into account the differences in relative liquidity among the individual components of current assets.

Leverage Ratios

If an analyst wishes to measure the extent of debt financing of a company, a leverage ratio is the right tool to use. This set of relationships reflecting the position of the company's financial risk. The two sources of data that these ratios can be calculated the balance sheet and income statement. The balance sheet leverage ratio measures the proportion of debt built in the capital ...