Ratio and Financial Statement Analysis

Executive Summary

Ratio analysis is one of the primary tools used to evaluate how the company is doing in the market i.e. growing or not makes it difficult to regulate the obligations and not excessively indebted, and generate appropriate returns and effective use of assets owned. In the case of trading indicators, this allow one to see how market assesses the situation i.e. if the share price falls, there may be deterioration in the assessment unit in the eyes of investors. Rating is done with financial indicators reflecting the relationship of carefully selected items of the financial statements. The most popular liquidity ratios include: current and acidic ratios which is also part of cash cycle, profitability (equity, net sales, the economic return on sales, gross sales), efficiency ratios (retention period or the cycle inventories, receivables, liabilities), total debt and interest coverage, operating leverage and investors ratios i.e. the price - earnings, market value to book value, earnings per share. Hence, they are a good way to evaluate the performance of the business and identify problems. But at the same time there are various advantages of ratios analysis and drawback, these should not be neglected as they have direct impact on the investors and customers.



EXECUTIVE SUMMARYII

INTRODUCTION1

RATIO ANALYSIS1

Main Features of Ratio Analysis1

Two Main Objectives of Ratio Analysis2

Users of Ratio Analysis2

Four Main Categories3

Liquidity Ratios3

Debt Management3

Operating Efficiency/Activity Ratio3

Profitability Ratios4

Ratio Analysis Main Principles4

BENEFITS AND LIMITATIONS OF RATIO ANALYSIS AND FACTORS IMPACT THE MEANINGFULNESS5

Advantages of Ratio Analysis5

Simple and straightforward5

Comparisons5

Forecasting5

Discipline6

Secondary Benefits6

Disadvantages Ratio Analysis7

Accounting Policies7

Outdated Information7

Creative Accounting7

Interpreting ratios8

Inflation8

Diverse Risk Profile8

Qualitative factors9

Secondary Drawback9

PRACTICAL APPLICATIONS AND REAL-WORLD9

CONCLUSION AND RECOMMENDATION11

REFERENCES12

Ratio and Financial Statement Analysis

Introduction

The focus of this paper would be on analyzing the benefits and limitations of Ratio Analysis and explaining what factors impact the meaningfulness of such measures and what new practices emerged regarding the application of ratio and financial statement analysis. Furthermore, paper would also stress on practical applications and real-world use of ratios.

Ratio Analysis

Ratio analysis is technique through which performance of the company is evaluated. This technique shows a relation between one variable to another. Through this analysis, management is able to highlight various spheres of business (primeacademy).

Main Features of Ratio Analysis

The following are the main features of Ratio analysis that give roots to initial analysis of financial statements.

Develop a preliminary analysis of financial statements

Use synthetic evaluation of various aspects of the economic activities of the company

This form is flexible and can be used according to the needs and interests of the audience - the possibility of selecting indicators

This allows a consistent interpretation of the status and financial situation by harmonizing the content of indicators (Kumbirai, Webb, 2010)

Two Main Objectives of Ratio Analysis

The following are the two main objectives of Ratio Analysis:

Predicting future events that constitute a threat to the enterprise based on knowledge of historical relations.

Comparison of the results of the company's owns historical performance and the performance of competitors for the purposes of optimization.

Users of Ratio Analysis

Ratio analysis has been employed and looked by the following people:

Managers ...