Financial Analysis & Management



Executive Summary

The purpose of this paper is to understand how and when to use & apply the financial analytical tools in practice necessitated making effective policies and business decisions. The paper has been divided in parts in which interpretation of financial statements through ratios and key investor ratios in understanding the performance of a business. Furthermore, there has been an explanation which will further provide an understanding of financial analysis tools and concepts which used in daily business activities. Hence, these are very important due to the importance of Accounting Foundations among management.

Table of Content

EXECUTIVE SUMMARYII

ANSWER 1)1

Pyramid of Ratios1

Interpretation of financial statements with Pyramid Ratios2

ANSWER 2)4

Key Investor Ratios4

Dividend Rate4

Dividend yield5

Earnings per Share6

Price earning - P/E ratio6

ANSWER 3)7

Importance of Profitability and Liquidity7

Working Capital and Liquidity Problems8

ANSWER 4)10

Chrisitie Company Evaluation10

Analysis of dividend policy of Chrisitie Company10

REFERENCES13

Financial Analysis & Management

Answer 1)

Pyramid of Ratios

Ratio analysis consideration is very helpful as it identify key ratios. Ratios which indicate the profitability and efficiency provide an over view of the company's productivity and operations trend. When combining these ratios in a pyramid it illustrates the company's financial conditions. Hence, it is a combine the income statement and balance sheet items in a tree structure that direct the user in more particular ratios i.e. the subsidiary ratios which usually focus on the particular area of problem. It is also known as DuPont pyramid of financial ratios.

The ratios which are merged in the DuPont pyramid of financial ratios are Profitability: Return on Assets - ROA and Return on Equity - ROE. They have precise structure of hierarchy through which evaluations are connected at diverse organizational level. This pyramid comprise of key basic ratios which also highlights the subsidiary ratios (Horne V., 2011).

Pyramid of Ratios

Interpretation of financial statements with Pyramid Ratios

These divided ratios in pyramid are very useful while interpreting financial statements. As they items deal with factors that contribute to the profitability of the equity of the business. As we know that return on equity is a key indicator of the profitability for the company's owners and they determine the rate of return for the investors. Pyramid of Ratios helps in interpreting financial analysis as it specify how each of the component areas affet6cing the viability of the firm's own capital. This also allows better diagnosis of the profit generation and their importance for this process (Reilly, Frank K. & Brown, Keith, 2003).

The first division is the profitability of the ROE and which is class upper part of the so call DuPont pyramid.

ROE = Net Income/Equity

= Net Income/ Assets x Assets/ Equity

Decomposition of the REO as a result of profitability shows that it consist return in assets and factors that we can use for the study of leverage. This further indicates the structure of funding sources specifically the relationships of the assets to equity and consequently hoe is the share of the financing of assets i.e. equity to assets minus liabilities. For theoretical point of view, where equity ...