This document provides an overview of ratio analysis and different types of ratios used to analyze financial statements. It discusses various ratio categories like liquidity, leverage, efficiency, and profitability ratios. It also explains Dupont analysis which breaks down return on equity into profit margin, asset turnover, and financial leverage. Additional topics covered include common size statements, comparative financial statements, trend analysis, advantages and limitations of these analytical tools. Ratios and other techniques allow comparison of performance over time and across companies.
Get a sample on Financial statement analysis explaining how equity investors have the objectives to know the business future earning capacity, growth potential and security of their holdings. All the investors are very much interested to get higher amount of returns. Therefore, they make risk and return analysis associated with their invested funds. Lenders such as bond investors have the objectives to know the short term as well as long term solvency of the business (Bushman and Smith, 2001).
Financial statement analysis involves analyzing a company's financial statements to assess its performance and financial position. It is used to evaluate factors like profitability, solvency, liquidity, and efficiency. Key tools for financial statement analysis include financial ratios, common size analysis, trend analysis, and comparisons to industry standards and past performance. The purpose is to provide useful information to decision makers about a company's historical performance, current condition, and future prospects.
Prepared by: Group 1
Leader:
Bau, Ella Mae G.
Members:
Adem, Angelie Lyka L.
Amper, Catherine Mae S.
Atienza, Trisha Lane M.
Babela, Ma. Ella V.
Bagang, Aleli M.
Bartolome, Kristine Joy G.
Bayani, Emanuel M.
Cabrera, Kathleen Anne A.
This document discusses financial statement analysis. It defines financial statement analysis as evaluating financial statements to understand a firm's operations and make decisions. The document outlines various tools for financial statement analysis, including comparative statements, common size statements, trend analysis, ratio analysis, cash flow analysis, and fund flow analysis. It also describes different types of ratios used in analysis, such as liquidity, leverage, profitability, and market test ratios.
Financial statement analysis by BIJAY KUMAR SHAWbijaykumarshaw
This document discusses financial statement analysis. It defines financial statements as presenting a periodic view of a company's financial progress and status. Financial statements are used by shareholders, creditors, stock exchanges, bankers, management, investors, and governments. Financial statement analysis studies the relationships between financial factors disclosed in statements and trends over time. It can be done externally by outsiders without company access or internally by management. The objectives are to understand the company, identify strengths and weaknesses, check fund movements, measure efficiency, and assess growth potential for comparison. Limitations include relying on user intentions, ignoring qualitative factors, and only using historical data. Common techniques discussed are comparative statements, common size statements, and trend analysis.
This document outlines what constitutes Financial Analysis to study a company's Balance Sheet, Profit and Loss accounts, Cash Flow Statements. It also provides guidance to do Ratio Analysis.
This document analyzes the financial statements of Reliance Industries Ltd over 10 years using various ratio analysis techniques. It calculates ratios such as the current ratio, quick ratio, debt-to-total assets ratio, trade receivables to revenue ratio, gross profit margin, and net profit margin to evaluate the company's performance and financial position over time. The analysis finds that the current ratio, quick ratio and profit margins have generally increased from year 1 to year 10, while debt levels have decreased, indicating an improvement in liquidity and profitability.
This document provides an overview of financial statement analysis and ratio analysis. It defines key financial statements like the income statement, balance sheet, and statement of cash flows. It also explains the purpose of ratio analysis is to evaluate a firm's performance, liquidity, profitability, and financial stability by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios covered include liquidity, leverage, activity, and profitability ratios. Ratio analysis is a useful tool but requires comparing ratios to standards and accounting for company and industry differences.
Get a sample on Financial statement analysis explaining how equity investors have the objectives to know the business future earning capacity, growth potential and security of their holdings. All the investors are very much interested to get higher amount of returns. Therefore, they make risk and return analysis associated with their invested funds. Lenders such as bond investors have the objectives to know the short term as well as long term solvency of the business (Bushman and Smith, 2001).
Financial statement analysis involves analyzing a company's financial statements to assess its performance and financial position. It is used to evaluate factors like profitability, solvency, liquidity, and efficiency. Key tools for financial statement analysis include financial ratios, common size analysis, trend analysis, and comparisons to industry standards and past performance. The purpose is to provide useful information to decision makers about a company's historical performance, current condition, and future prospects.
Prepared by: Group 1
Leader:
Bau, Ella Mae G.
Members:
Adem, Angelie Lyka L.
Amper, Catherine Mae S.
Atienza, Trisha Lane M.
Babela, Ma. Ella V.
Bagang, Aleli M.
Bartolome, Kristine Joy G.
Bayani, Emanuel M.
Cabrera, Kathleen Anne A.
This document discusses financial statement analysis. It defines financial statement analysis as evaluating financial statements to understand a firm's operations and make decisions. The document outlines various tools for financial statement analysis, including comparative statements, common size statements, trend analysis, ratio analysis, cash flow analysis, and fund flow analysis. It also describes different types of ratios used in analysis, such as liquidity, leverage, profitability, and market test ratios.
Financial statement analysis by BIJAY KUMAR SHAWbijaykumarshaw
This document discusses financial statement analysis. It defines financial statements as presenting a periodic view of a company's financial progress and status. Financial statements are used by shareholders, creditors, stock exchanges, bankers, management, investors, and governments. Financial statement analysis studies the relationships between financial factors disclosed in statements and trends over time. It can be done externally by outsiders without company access or internally by management. The objectives are to understand the company, identify strengths and weaknesses, check fund movements, measure efficiency, and assess growth potential for comparison. Limitations include relying on user intentions, ignoring qualitative factors, and only using historical data. Common techniques discussed are comparative statements, common size statements, and trend analysis.
This document outlines what constitutes Financial Analysis to study a company's Balance Sheet, Profit and Loss accounts, Cash Flow Statements. It also provides guidance to do Ratio Analysis.
This document analyzes the financial statements of Reliance Industries Ltd over 10 years using various ratio analysis techniques. It calculates ratios such as the current ratio, quick ratio, debt-to-total assets ratio, trade receivables to revenue ratio, gross profit margin, and net profit margin to evaluate the company's performance and financial position over time. The analysis finds that the current ratio, quick ratio and profit margins have generally increased from year 1 to year 10, while debt levels have decreased, indicating an improvement in liquidity and profitability.
This document provides an overview of financial statement analysis and ratio analysis. It defines key financial statements like the income statement, balance sheet, and statement of cash flows. It also explains the purpose of ratio analysis is to evaluate a firm's performance, liquidity, profitability, and financial stability by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios covered include liquidity, leverage, activity, and profitability ratios. Ratio analysis is a useful tool but requires comparing ratios to standards and accounting for company and industry differences.
Analysis & interpretation of financial statementsry_moore
This document discusses various methods for analyzing financial statements, including ratios to evaluate profitability, liquidity, and returns. It defines key ratios like stock turnover, gross/net profit percentages, current ratio, acid test ratio, and return on investment. These ratios are used to analyze aspects of the business like profit results, financial status, working capital, and mark-up/margin. Calculating and interpreting these ratios provides meaningful insights about the business's performance and financial health.
This document discusses common size analysis, which allows companies to be compared across time and against competitors by expressing financial statement items as percentages of a base figure. There are three types of common size analysis: vertical common size income statements, horizontal common size income statements, and common size balance sheets. An example is provided where net income figures for two companies of different sizes are expressed as a percentage of sales revenue for better comparison. The document outlines some limitations of common size analysis and provides an example analysis of common size income statements and balance sheets.
This document discusses various techniques for analyzing financial statements, including ratio analysis and common size statements. It provides examples of calculating different types of ratios to evaluate a company's liquidity, capital structure, profitability and efficiency. Ratios discussed include the current ratio, acid-test ratio, inventory turnover ratio, debtors turnover ratio, creditors turnover ratio, debt-equity ratio and interest coverage ratio. The document emphasizes that ratio analysis is a tool to assess the strengths, weaknesses, historical performance and current financial condition of a firm.
This document discusses financial statement analysis and its importance for business survival and decision making. It outlines key factors like profitability and solvency. Financial statement analysis involves tools like ratio analysis that analyze relationships between financial data to assess a business's past performance, current condition, and future prospects. Common ratios examine aspects like profitability, liquidity, asset use, financial risk, and market indicators.
Ratio analysis measures relationships between financial variables to show how a firm's situation compares to its past, other firms, and the industry. Ratios are used to identify performance, standardize information, provide early warnings, and enable trend spotting. Key types of ratios include liquidity, activity, debt, and profitability. Liquidity ratios measure a firm's ability to pay obligations and include current, quick, and cash ratios. Activity ratios evaluate efficiency through measures like inventory turnover, accounts receivable period, and asset turnover.
The document provides examples of how to calculate various financial ratios used in analyzing financial statements. It includes calculations for current and quick ratios, average accounts receivable and related turnover ratios, inventory turnover ratios, times interest earned ratio, debt and debt to equity ratios, return on sales, return on assets, earnings per share, price earnings ratio, dividend yield, and dividend payout ratio. The document demonstrates how to perform the calculations using financial data from sample company income statements and balance sheets.
This presentation discusses vertical analysis, which is used to find financial percentages in financial statements. Vertical analysis examines how each line item on an income statement or balance sheet relates to the total by expressing it as a percentage. It allows businesses to compare financial metrics over time and against other companies. The presentation provides examples of how vertical analysis appears on an income statement and balance sheet by listing each item as a percentage of the total. Real-world examples from UPMC and Pinnacle health systems are also presented.
Financial statement analysis involves analyzing a company's financial statements to assess its performance and financial position. It is done by both internal managers and external parties such as investors and creditors. Key aspects of financial statement analysis include ratio analysis, trend analysis, and comparative analysis. Ratio analysis calculates and analyzes financial ratios to evaluate aspects such as liquidity, asset efficiency, debt levels, profitability, and investor returns. Trend analysis examines changes in financial metrics over several periods. Comparative analysis compares financial results to other companies or years. The overall goal is to evaluate the company's financial health and identify strengths and weaknesses.
This document summarizes different types of financial statement analysis including percentage, ratio, horizontal, and vertical analysis. It discusses various liquidity, profitability, efficiency, and solvency ratios that are used in financial statement analysis such as current ratio, acid test ratio, profit margin, return on assets, inventory turnover, and debt ratio. The document provides examples of how to calculate each type of ratio using financial data from sample company statements.
This document discusses various types of financial statement analysis including trend analysis, comparative statements, common size statements, and ratio analysis. It provides templates for comparative balance sheets and income statements showing calculations of amount and percentage changes between periods. It also includes templates for common size statements showing items as a percentage of total capital employed or net sales. Financial statement analysis is used to measure profitability, growth, financial strength, and solvency by analyzing relationships and trends over time from financial statements.
Financial ratios are calculated using data from financial statements and allow comparisons of a company's performance over time and against other companies. There are several types of ratios including liquidity, asset turnover, financial leverage, profitability, and dividend policy ratios. Ratios have limitations when used alone but provide insights into a company's financial health when analyzed together over multiple periods. Common ratios include the current ratio for liquidity, inventory turnover for asset use, debt ratio for leverage, gross profit margin for profitability, and dividend yield for dividend policy.
Financial statement analysis involves assessing a firm's past, present, and future financial conditions to identify strengths and weaknesses. Key tools include financial statements and ratio analysis, which standardizes information for comparisons of performance over time, against peers, and to industry standards. Ratio analysis is used for tasks like evaluating loan applications, creditworthiness, mergers, and investment opportunities. Ratios measure liquidity, leverage, activity/efficiency, and profitability.
Guidelines and uses of financial statement analysisTutors On Net
Computing ratios help in questioning
correctly about the company’s financial position, even though accurate answers may
be given, ratios form a mode in understanding company’s affairs
Horizontal analysis is also known as Trend Analysis refers to studying the behavior of individual financial statement items over several accounting periods. The Vertical Analysis concentrates on the relationships between various financial items on a financial statement. Copy the link given below and paste it in new browser window to get more information on Horizontal and Vertical Analysis:- http://www.transtutors.com/homework-help/accounting/horizontal-and-vertical-analysis.aspx
The document discusses different types of income statements, including single-step and multiple-step income statements. A single-step income statement presents revenues and expenses in broad categories, while a multiple-step income statement distinguishes operating activities from non-operating activities. The document also defines irregular items reported on an income statement such as discontinued operations, extraordinary items, and changes in accounting principles.
Financial Reporting And Analysis Explained.as to why is it important, Who is it important for and the different ways of analyzing a financial statement.
Greenwich University
Bba 2204 fin mgt week 3 financial ratiosStephen Ong
This document provides an overview of financial statements and ratio analysis. It discusses the key financial statements including the income statement, balance sheet, statement of retained earnings, and statement of cash flows. It also covers consolidating international financial statements and how various parties use ratio analysis to evaluate a firm's liquidity, activity, debt, and profitability by comparing financial metrics to industry averages and past performance. Specific examples are provided to demonstrate calculating common ratios like the current ratio, inventory turnover, times interest earned, and gross profit margin for a sample company. The document is intended to help readers understand how to use ratio analysis to evaluate a firm's financial health.
financial statement analysis
,
competencies for ratio analysis
,
function and purposes of ratio analysis
,
classes of ratios
,
liquidity ratios
,
activity ratios / asset management ratios
,
profitability ratios
,
debt or leverage ratios/solvency ratios
,
debt ratio
,
times interest earned ratio
,
market ratios
,
return on common equity (roe)
,
fixed-payment coverage ratio
,
gross profit margin
,
earnings per share (eps)
,
price/earnings (p/e) ratio
,
operating profit margin
,
market/book (m/b) ratio
,
return on total assets (roa)
,
net profit margin
The document discusses ratio analysis, which involves using ratios to analyze a company's financial statements and determine its financial soundness. It defines various types of ratios including liquidity, profitability, and solvency ratios. It also covers the classification, calculation, and interpretation of different financial ratios like the current ratio, quick ratio, and absolute liquid ratio.
Original article from the Flevy business blog can be found here:
http://flevy.com/blog/whats-the-impact-of-ratios-in-financial-analysis/
Financial statement analysis can be referred as a process of understanding the risk and profitability of a company by analyzing reported financial info, especially annual and quarterly reports. In other words, financial statement analysis is a study about accounting ratios among various items included in the balance sheet.
Advantages of Financial Statement Analysis
The different advantages of financial statement analysis are listed below:
The most important benefit if financial statement analysis is that it provides an idea to the investors about deciding on investing their funds in a particular company.
Another advantage of financial statement analysis is that regulatory authorities can ensure the company following the required accounting standards.
Financial statement analysis is helpful to the government agencies in analyzing the taxation owed to the firm.
Above all, the company is able to analyze its own performance over a specific time period.
From the above, it is obvious that only way for financial analysis is ratio analysis.
What is Ratio analysis?
What is the role/Importance of ratio analysis in financial analysis?
What are its advantages?
How it helps out in decision making?
How it helps the auditor in assessment of the risk of material misstatement?
These are some questions the answer of each must be known by every professional, business man and by user of financial statement. Some of you may already know about these. The answer of these questions must be part of professional’s life and business man must know to keep check on the management progress.
In simple words, we can say that ratio analysis is “quantitative analysis of information contained in a company’s financial statements.” In fact, it is critical quantitative analysis.
This document discusses ratio analysis and its applications. Ratio analysis involves comparing financial metrics and ratios to evaluate a company's performance over time, against its peers, and relative to industry benchmarks. The key types of ratios covered are liquidity ratios, solvency ratios, profitability ratios, efficiency ratios, coverage ratios, and market prospect ratios. Specific ratios discussed include the current ratio, debt-to-equity ratio, return on assets, inventory turnover, and dividend yield. The document emphasizes that ratio analysis is most insightful when trends are analyzed over time and when comparisons are made to competitors in the same industry.
The document provides an overview of financial statement analysis, including the different types of analysis. It discusses internal and external analysis, short-term and long-term analysis, horizontal and vertical analysis. It also defines various accounting ratios used in analysis, such as liquidity ratios, profitability ratios, leverage ratios, and activity/efficiency ratios. Specific types of ratios discussed include the current ratio, debt-to-equity ratio, gross profit margin, and inventory turnover ratio. The document also covers limitations of financial statements and how to prepare horizontal and vertical analyses.
Analysis & interpretation of financial statementsry_moore
This document discusses various methods for analyzing financial statements, including ratios to evaluate profitability, liquidity, and returns. It defines key ratios like stock turnover, gross/net profit percentages, current ratio, acid test ratio, and return on investment. These ratios are used to analyze aspects of the business like profit results, financial status, working capital, and mark-up/margin. Calculating and interpreting these ratios provides meaningful insights about the business's performance and financial health.
This document discusses common size analysis, which allows companies to be compared across time and against competitors by expressing financial statement items as percentages of a base figure. There are three types of common size analysis: vertical common size income statements, horizontal common size income statements, and common size balance sheets. An example is provided where net income figures for two companies of different sizes are expressed as a percentage of sales revenue for better comparison. The document outlines some limitations of common size analysis and provides an example analysis of common size income statements and balance sheets.
This document discusses various techniques for analyzing financial statements, including ratio analysis and common size statements. It provides examples of calculating different types of ratios to evaluate a company's liquidity, capital structure, profitability and efficiency. Ratios discussed include the current ratio, acid-test ratio, inventory turnover ratio, debtors turnover ratio, creditors turnover ratio, debt-equity ratio and interest coverage ratio. The document emphasizes that ratio analysis is a tool to assess the strengths, weaknesses, historical performance and current financial condition of a firm.
This document discusses financial statement analysis and its importance for business survival and decision making. It outlines key factors like profitability and solvency. Financial statement analysis involves tools like ratio analysis that analyze relationships between financial data to assess a business's past performance, current condition, and future prospects. Common ratios examine aspects like profitability, liquidity, asset use, financial risk, and market indicators.
Ratio analysis measures relationships between financial variables to show how a firm's situation compares to its past, other firms, and the industry. Ratios are used to identify performance, standardize information, provide early warnings, and enable trend spotting. Key types of ratios include liquidity, activity, debt, and profitability. Liquidity ratios measure a firm's ability to pay obligations and include current, quick, and cash ratios. Activity ratios evaluate efficiency through measures like inventory turnover, accounts receivable period, and asset turnover.
The document provides examples of how to calculate various financial ratios used in analyzing financial statements. It includes calculations for current and quick ratios, average accounts receivable and related turnover ratios, inventory turnover ratios, times interest earned ratio, debt and debt to equity ratios, return on sales, return on assets, earnings per share, price earnings ratio, dividend yield, and dividend payout ratio. The document demonstrates how to perform the calculations using financial data from sample company income statements and balance sheets.
This presentation discusses vertical analysis, which is used to find financial percentages in financial statements. Vertical analysis examines how each line item on an income statement or balance sheet relates to the total by expressing it as a percentage. It allows businesses to compare financial metrics over time and against other companies. The presentation provides examples of how vertical analysis appears on an income statement and balance sheet by listing each item as a percentage of the total. Real-world examples from UPMC and Pinnacle health systems are also presented.
Financial statement analysis involves analyzing a company's financial statements to assess its performance and financial position. It is done by both internal managers and external parties such as investors and creditors. Key aspects of financial statement analysis include ratio analysis, trend analysis, and comparative analysis. Ratio analysis calculates and analyzes financial ratios to evaluate aspects such as liquidity, asset efficiency, debt levels, profitability, and investor returns. Trend analysis examines changes in financial metrics over several periods. Comparative analysis compares financial results to other companies or years. The overall goal is to evaluate the company's financial health and identify strengths and weaknesses.
This document summarizes different types of financial statement analysis including percentage, ratio, horizontal, and vertical analysis. It discusses various liquidity, profitability, efficiency, and solvency ratios that are used in financial statement analysis such as current ratio, acid test ratio, profit margin, return on assets, inventory turnover, and debt ratio. The document provides examples of how to calculate each type of ratio using financial data from sample company statements.
This document discusses various types of financial statement analysis including trend analysis, comparative statements, common size statements, and ratio analysis. It provides templates for comparative balance sheets and income statements showing calculations of amount and percentage changes between periods. It also includes templates for common size statements showing items as a percentage of total capital employed or net sales. Financial statement analysis is used to measure profitability, growth, financial strength, and solvency by analyzing relationships and trends over time from financial statements.
Financial ratios are calculated using data from financial statements and allow comparisons of a company's performance over time and against other companies. There are several types of ratios including liquidity, asset turnover, financial leverage, profitability, and dividend policy ratios. Ratios have limitations when used alone but provide insights into a company's financial health when analyzed together over multiple periods. Common ratios include the current ratio for liquidity, inventory turnover for asset use, debt ratio for leverage, gross profit margin for profitability, and dividend yield for dividend policy.
Financial statement analysis involves assessing a firm's past, present, and future financial conditions to identify strengths and weaknesses. Key tools include financial statements and ratio analysis, which standardizes information for comparisons of performance over time, against peers, and to industry standards. Ratio analysis is used for tasks like evaluating loan applications, creditworthiness, mergers, and investment opportunities. Ratios measure liquidity, leverage, activity/efficiency, and profitability.
Guidelines and uses of financial statement analysisTutors On Net
Computing ratios help in questioning
correctly about the company’s financial position, even though accurate answers may
be given, ratios form a mode in understanding company’s affairs
Horizontal analysis is also known as Trend Analysis refers to studying the behavior of individual financial statement items over several accounting periods. The Vertical Analysis concentrates on the relationships between various financial items on a financial statement. Copy the link given below and paste it in new browser window to get more information on Horizontal and Vertical Analysis:- http://www.transtutors.com/homework-help/accounting/horizontal-and-vertical-analysis.aspx
The document discusses different types of income statements, including single-step and multiple-step income statements. A single-step income statement presents revenues and expenses in broad categories, while a multiple-step income statement distinguishes operating activities from non-operating activities. The document also defines irregular items reported on an income statement such as discontinued operations, extraordinary items, and changes in accounting principles.
Financial Reporting And Analysis Explained.as to why is it important, Who is it important for and the different ways of analyzing a financial statement.
Greenwich University
Bba 2204 fin mgt week 3 financial ratiosStephen Ong
This document provides an overview of financial statements and ratio analysis. It discusses the key financial statements including the income statement, balance sheet, statement of retained earnings, and statement of cash flows. It also covers consolidating international financial statements and how various parties use ratio analysis to evaluate a firm's liquidity, activity, debt, and profitability by comparing financial metrics to industry averages and past performance. Specific examples are provided to demonstrate calculating common ratios like the current ratio, inventory turnover, times interest earned, and gross profit margin for a sample company. The document is intended to help readers understand how to use ratio analysis to evaluate a firm's financial health.
financial statement analysis
,
competencies for ratio analysis
,
function and purposes of ratio analysis
,
classes of ratios
,
liquidity ratios
,
activity ratios / asset management ratios
,
profitability ratios
,
debt or leverage ratios/solvency ratios
,
debt ratio
,
times interest earned ratio
,
market ratios
,
return on common equity (roe)
,
fixed-payment coverage ratio
,
gross profit margin
,
earnings per share (eps)
,
price/earnings (p/e) ratio
,
operating profit margin
,
market/book (m/b) ratio
,
return on total assets (roa)
,
net profit margin
The document discusses ratio analysis, which involves using ratios to analyze a company's financial statements and determine its financial soundness. It defines various types of ratios including liquidity, profitability, and solvency ratios. It also covers the classification, calculation, and interpretation of different financial ratios like the current ratio, quick ratio, and absolute liquid ratio.
Original article from the Flevy business blog can be found here:
http://flevy.com/blog/whats-the-impact-of-ratios-in-financial-analysis/
Financial statement analysis can be referred as a process of understanding the risk and profitability of a company by analyzing reported financial info, especially annual and quarterly reports. In other words, financial statement analysis is a study about accounting ratios among various items included in the balance sheet.
Advantages of Financial Statement Analysis
The different advantages of financial statement analysis are listed below:
The most important benefit if financial statement analysis is that it provides an idea to the investors about deciding on investing their funds in a particular company.
Another advantage of financial statement analysis is that regulatory authorities can ensure the company following the required accounting standards.
Financial statement analysis is helpful to the government agencies in analyzing the taxation owed to the firm.
Above all, the company is able to analyze its own performance over a specific time period.
From the above, it is obvious that only way for financial analysis is ratio analysis.
What is Ratio analysis?
What is the role/Importance of ratio analysis in financial analysis?
What are its advantages?
How it helps out in decision making?
How it helps the auditor in assessment of the risk of material misstatement?
These are some questions the answer of each must be known by every professional, business man and by user of financial statement. Some of you may already know about these. The answer of these questions must be part of professional’s life and business man must know to keep check on the management progress.
In simple words, we can say that ratio analysis is “quantitative analysis of information contained in a company’s financial statements.” In fact, it is critical quantitative analysis.
This document discusses ratio analysis and its applications. Ratio analysis involves comparing financial metrics and ratios to evaluate a company's performance over time, against its peers, and relative to industry benchmarks. The key types of ratios covered are liquidity ratios, solvency ratios, profitability ratios, efficiency ratios, coverage ratios, and market prospect ratios. Specific ratios discussed include the current ratio, debt-to-equity ratio, return on assets, inventory turnover, and dividend yield. The document emphasizes that ratio analysis is most insightful when trends are analyzed over time and when comparisons are made to competitors in the same industry.
The document provides an overview of financial statement analysis, including the different types of analysis. It discusses internal and external analysis, short-term and long-term analysis, horizontal and vertical analysis. It also defines various accounting ratios used in analysis, such as liquidity ratios, profitability ratios, leverage ratios, and activity/efficiency ratios. Specific types of ratios discussed include the current ratio, debt-to-equity ratio, gross profit margin, and inventory turnover ratio. The document also covers limitations of financial statements and how to prepare horizontal and vertical analyses.
This document discusses the usefulness and limitations of financial ratio analysis in evaluating a firm's performance. It begins by defining common ratios like liquidity, leverage, profitability, and valuation ratios. While ratios can help analyze statements, judge efficiency, locate weaknesses, and compare performance, the document notes they are limited by factors like inflation, seasonal changes, different industries, and conflicting ratios. However, the document argues ratios still serve an important role by facilitating analysis of financial statements, judging efficiency, locating weaknesses, formulating plans, comparing performance over time, and assessing operating efficiency. Therefore, despite limitations, financial ratio analysis remains an important tool for evaluating a firm's performance.
Here are the steps to calculate the key ratios:
1. Gross Profit Ratio = Gross Profit/Net Sales x 100 = 201000/560000 x 100 = 35.89%
2. Operating Expenses Ratio = (Administrative Expenses + Selling and Distribution Expenses)/Net Sales x 100 = (20000 + 89000)/560000 x 100 = 18.75%
3. Operating Profit Ratio = Gross Profit - Operating Expenses/Net Sales x 100 = 201000 - (20000 + 89000)/560000 x 100 = 17.14%
4. Net Profit Ratio = Net Profit/Net Sales x 100 = 800/560000 x 100 = 0.14%
This document discusses various techniques for financial analysis, including ratios and fund flow statements, with a focus on DuPont analysis. It defines financial analysis and its goals of assessing profitability, solvency, liquidity, and stability. Common methods are comparing financial ratios over time, between companies, and using percentage and comparative analyses. DuPont analysis breaks down return on equity into net profit margin, asset turnover, and financial leverage. It provides insight into a company's strengths and weaknesses.
A study on financial perfomance don for precot meridian limitedJagadeeshB15
This document provides an overview of ratio analysis of financial statements. It discusses the uses of ratio analysis for various stakeholders like shareholders, creditors, employees, government and management. It also covers the different types of ratios like liquidity ratios, leverage ratios, activity ratios and profitability ratios. Standards of comparison for ratios are important and ratios can be compared over time periods for a company or compared to industry averages. The document provides context on calculating and interpreting various financial ratios to evaluate the financial position and performance of a company.
The preparation of financial statements is a key aspect of an organisation's financial management as it relates to the recording and reporting of financial transactions and activities.
Financial statements support decision-making and financial analysis by providing a comprehensive overview of a company's financial performance, position and cash flow.
This document provides an overview of ratio analysis, which is a quantitative method used to evaluate a company's financial health and performance. It discusses the different types of ratios that can be used, including liquidity, solvency, profitability, efficiency, coverage, and market prospect ratios. These ratios are calculated using financial data from statements like the balance sheet and income statement. Ratio analysis allows comparison of a company's performance over time, against industry averages, and relative to other companies in the same sector. Examples are provided to demonstrate how ratios can be used to compare profitability and valuation of different companies.
Ratio Analysis
ii | P a g e
Contents
Introduction .................................................................................................................................... 1
The Ratios ....................................................................................................................................... 2
Profitability Sustainability Ratios........................................................................................... 2
Operational Efficiency Ratios ................................................................................................ 5
Liquidity Ratios .......................................................................................................................... 7
Leverage Ratios ........................................................................................................................ 9
Other Ratios ........................................................................................................................... 10
Ratio Analysis
1 | P a g e
Introduction
A sustainable business and mission requires effective planning and financial
management. Ratio analysis is a useful management tool that will improve your
understanding of financial results and trends over time, and provide key indicators of
organizational performance. Managers will use ratio analysis to pinpoint strengths
and weaknesses from which strategies and initiatives can be formed. Funders may use
ratio analysis to measure your results against other organizations or make judgments
concerning management effectiveness and mission impact
For ratios to be useful and meaningful, they must be:
o Calculated using reliable, accurate financial information (does your financial
information reflect your true cost picture?)
o Calculated consistently from period to period
o Used in comparison to internal benchmarks and goals
o Used in comparison to other companies in your industry
o Viewed both at a single point in time and as an indication of broad trends and
issues over time
o Carefully interpreted in the proper context, considering there are many other
important factors and indicators involved in assessing performance.
Ratios can be divided into four major categories:
o Profitability Sustainability
o Operational Efficiency
o Liquidity
o Leverage (Funding – Debt, Equity, Grants)
The ratios presented below represent some of the standard ratios used in business
practice and are provided as guidelines. Not all these ratios will provide the
information you need to support your particular decisions and strategies. You can also
develop your own ratios and indicators based on what you consider important and
meaningful to your organization and stakeholders.
Ratio Analysis
2 | P a g e
The Ratios
Profitability Sustainability Ratios
How well is our business performing over a specific period, will yo ...
Explain the various categories of ratio analysis and provide example.pdfarchanenterprises
Explain the various categories of ratio analysis and provide examples of at least two ratios in
each category. If you were an investor, which category would you be most interested in? Why?
Solution
Part-1
Ratios are used by lenders and business analysts to determine a company\'s financial stability and
standing.It\'s important to understand that financial ratios are time sensitive; they can only show
a picture of a business at a given time. There are five catagories of Financial ratios and those are
as follows :
Part-2 :
There are a large variety of ratios out there, but for an investor using financial ratios which are
broken up into four major categories: profitability ratios, liquidity ratios, solvency ratios and
valuation ratios. As an investor he should consider Profitability ratio because Profitability ratio is
a key piece of information that should be analyzed when you\'re considering investing in a
company. This is because high revenues alone don\'t necessarily translate into dividends for
investors unless a company is able to clear all of its expenses and costs. In general, the higher a
company\'s profit margin, the better, but as with most ratios, it is not enough to look at it in
isolation. It is important to compare it to the company\'s past levels, to the market average and to
its competitors.
Profitability Ratios : The profitability ratios are just what the name implies. They focus on the
firm\'s ability to generate a profit and an adequate return on assets and equity. They measure how
efficiently the firm uses its assets and how effectively it manages its operations and answers
questions like how efficiency his business and it helps to compare with other competitor.
Examples of Proftitablity ratios are Gross profit ratio, Net profit ratio, Operating profit ratio and
Return on investment ratio.
Market Value Ratios : The market value ratios can be calculated for publicly traded companies
only as they relate to stock price. There are many market value ratios, but a few of the most
commonly used are price/earnings (P/E), book value to share value and dividend yield .
LEVERAGE RATIO /Capital Structure ration : The term capital structure refers to the
relationship between various long term forms of financing such as debentures (long term),
preference share capital and equity share capital including reserves and surpluses. Leverage or
capital structure ratios are calculated to test the long term financial position of a firm. Generally
capital gearing ratio is mainly calculated to analyse the leverage or capital structure of the firm.
Example of ratios are total debt ratios, the debt/equity ratio, the long-term debt ratio, the times
interest earned ratio, the fixed charge coverage ratio, and the cash coverage ratio.
Asset Efficiency or Turnover Ratios : The asset efficiency or turnover ratios measure the
efficiency with which the firm uses its assets to produce sales. As a result, it focuses on both the
income statement (sales) and the .
The document discusses ratio analysis, which involves calculating and interpreting various financial ratios to evaluate aspects of a company's performance and financial position. It defines key ratios including liquidity ratios, activity ratios, profitability ratios, and leverage ratios. It provides formulas and examples for specific ratios like current ratio, inventory turnover, debt-to-equity ratio, and return on equity. The purpose of ratio analysis is to help assess a company's liquidity, profitability, financial stability, and management quality.
Ratio AnalysisFinancial ratios can be used to examine various as.docxcatheryncouper
Ratio Analysis
Financial ratios can be used to examine various aspects of the financial position and performance of a business and are widely used for planning and control purposes.
They can be used to evaluate the financial health of a business and can be utilised by management in a wide variety of decisions involving such areas as profit planning, pricing, working-capital management, financial structure and dividend policy.
Ratio analysis provides a fairly simplistic method of examining the financial condition of a business.
A ratio expresses the relation of one figure appearing in the financial statements to some other figure appearing there.
Ratios enable comparison between businesses.
Differences may exist between businesses in the scale of operations making comparison via the profits generated unreliable.
Ratios can eliminate this uncertainty.
Other than comparison with other businesses, it is also a valuable tool in analysing the performance of one business over time.
However useful ratios are not without their problems.
Figures calculated through ratio analysis can highlight the financial strengths and weaknesses of a business but they cannot, by themselves, explain why certain strengths or weaknesses exist or why certain changes have occurred.
Only detailed investigation will reveal these underlying reasons. Ratios must, therefore, be seen as a ‘starting point’.
Financial ratio classification
The following ratios are considered the more important for decision-making purposes:
Ratios can be grouped into certain categories, each of which reflects a particular aspect of financial performance or position.
The following broad categories provide a useful basis for explaining the nature of the financial ratios to be dealt with.
Profitability.Businesses come into being with the primary purpose of creating wealth for the owners. Profitability ratios provide an insight to the degree of success in achieving this purpose. They express the profits made in relation to other key figures in the financial statements or to some business resource.
Efficiency.Ratios may be used to measure the efficiency with which certain resource have been utilised within the business. These ratios are also referred to as active ratios.
Liquidity.It is vital to the survival of a business that there be sufficient liquid resources available to meet maturing obligations. Certain ratios may be calculated that examines the relationship between liquid resources held and creditors due for payment in the near future.
Gearing.This is the relationship between the amount financed by the owners of the business and the amount contributed by outsiders, which has an important effect on the degree of risk associated with a business. Gearing is then something that managers must consider when making financing decisions.
Investment.Certain ratios are concerned with assessing the returns and performance of shares held in a particular business.
Profitabi ...
Ratio analysis involves calculating and analyzing financial ratios from a company's financial statements to evaluate aspects of the business such as profitability, liquidity, solvency, and efficiency. The presentation discusses four main types of financial ratios: liquidity ratios, which assess a company's ability to meet short-term debts; solvency ratios, which evaluate long-term viability; activity ratios, which measure efficiency of resource use; and profitability ratios, which determine ability to earn profits relative to expenses. Ratio analysis is useful for comparing performance over time and between competitors, identifying trends, and determining operational efficiency.
GAIL (India) Limited is India's largest natural gas processing and distribution company that is owned by the Government of India. Some key points:
- GAIL commissioned India's first cross-country natural gas pipeline in 1991 that helped develop India's natural gas market.
- It has expanded operations globally through subsidiaries in Singapore and the US to pursue international opportunities.
- In addition to its pipeline infrastructure, GAIL also operates in the areas of city gas distribution and exploration and production.
- The company allocates 2% of its annual profits to corporate social responsibility programs focused on communities near its work centers.
Financial reporting plays an important role in exhibiting a business's financial position through financial statements like the balance sheet, income statement, and cash flow statement. The balance sheet provides a snapshot of a company's financial health in terms of assets, liabilities, and equity. The income statement measures performance through sales and profits. The cash flow statement shows how a company generates and spends cash. Accurate financial reporting is crucial for management to understand profitability, leverage, liquidity, and efficiency to guide strategic decision-making.
The document appears to be a student's project report on financial ratio analysis of Wipro. It includes an acknowledgment section thanking individuals who supported and guided the project. It also includes a declaration by the student stating that the work is original. The project report includes various chapters that will analyze Wipro's financial ratios to assess the company's performance and financial position. It provides an overview of the objectives and methodology that will be used in the ratio analysis.
1. The document is a student's project report on the financial ratio analysis of Wipro. It includes an acknowledgment section thanking various professors and institutions for their support and guidance.
2. There is a declaration by the student stating that the project is their original work and submitted for their Master's degree program.
3. The project contains a certificate from the student's teacher guide confirming they completed the research project on the given topic under their guidance.
Financial statement analysis, as the name suggests is the analysis of financial statements. Generally, the financial statements of an organization include the profit and loss account or the income statement, the balance sheet and the statement of cash flows.
1. The document discusses ratio analysis and financial analysis. Ratio analysis is a tool that evaluates the financial position and performance of a firm by establishing relationships between financial statement items.
2. Financial analysis identifies the financial strengths and weaknesses of a firm. It is done by analyzing ratios calculated from a firm's balance sheet and income statement. Key ratios include liquidity ratios, profitability ratios, and leverage ratios.
3. Ratio analysis involves comparing a firm's ratios to standards like its own past ratios, competitor ratios, industry averages, and projected ratios. This allows users to evaluate the firm's financial stability, profitability, and efficiency over time.
বাংলাদেশের অর্থনৈতিক সমীক্ষা ২০২৪ [Bangladesh Economic Review 2024 Bangla.pdf] কম্পিউটার , ট্যাব ও স্মার্ট ফোন ভার্সন সহ সম্পূর্ণ বাংলা ই-বুক বা pdf বই " সুচিপত্র ...বুকমার্ক মেনু 🔖 ও হাইপার লিংক মেনু 📝👆 যুক্ত ..
আমাদের সবার জন্য খুব খুব গুরুত্বপূর্ণ একটি বই ..বিসিএস, ব্যাংক, ইউনিভার্সিটি ভর্তি ও যে কোন প্রতিযোগিতা মূলক পরীক্ষার জন্য এর খুব ইম্পরট্যান্ট একটি বিষয় ...তাছাড়া বাংলাদেশের সাম্প্রতিক যে কোন ডাটা বা তথ্য এই বইতে পাবেন ...
তাই একজন নাগরিক হিসাবে এই তথ্য গুলো আপনার জানা প্রয়োজন ...।
বিসিএস ও ব্যাংক এর লিখিত পরীক্ষা ...+এছাড়া মাধ্যমিক ও উচ্চমাধ্যমিকের স্টুডেন্টদের জন্য অনেক কাজে আসবে ...
How to Fix the Import Error in the Odoo 17Celine George
An import error occurs when a program fails to import a module or library, disrupting its execution. In languages like Python, this issue arises when the specified module cannot be found or accessed, hindering the program's functionality. Resolving import errors is crucial for maintaining smooth software operation and uninterrupted development processes.
How to Setup Warehouse & Location in Odoo 17 InventoryCeline George
In this slide, we'll explore how to set up warehouses and locations in Odoo 17 Inventory. This will help us manage our stock effectively, track inventory levels, and streamline warehouse operations.
A workshop hosted by the South African Journal of Science aimed at postgraduate students and early career researchers with little or no experience in writing and publishing journal articles.
Strategies for Effective Upskilling is a presentation by Chinwendu Peace in a Your Skill Boost Masterclass organisation by the Excellence Foundation for South Sudan on 08th and 09th June 2024 from 1 PM to 3 PM on each day.
This slide is special for master students (MIBS & MIFB) in UUM. Also useful for readers who are interested in the topic of contemporary Islamic banking.
Exploiting Artificial Intelligence for Empowering Researchers and Faculty, In...Dr. Vinod Kumar Kanvaria
Exploiting Artificial Intelligence for Empowering Researchers and Faculty,
International FDP on Fundamentals of Research in Social Sciences
at Integral University, Lucknow, 06.06.2024
By Dr. Vinod Kumar Kanvaria
it describes the bony anatomy including the femoral head , acetabulum, labrum . also discusses the capsule , ligaments . muscle that act on the hip joint and the range of motion are outlined. factors affecting hip joint stability and weight transmission through the joint are summarized.
LAND USE LAND COVER AND NDVI OF MIRZAPUR DISTRICT, UPRAHUL
This Dissertation explores the particular circumstances of Mirzapur, a region located in the
core of India. Mirzapur, with its varied terrains and abundant biodiversity, offers an optimal
environment for investigating the changes in vegetation cover dynamics. Our study utilizes
advanced technologies such as GIS (Geographic Information Systems) and Remote sensing to
analyze the transformations that have taken place over the course of a decade.
The complex relationship between human activities and the environment has been the focus
of extensive research and worry. As the global community grapples with swift urbanization,
population expansion, and economic progress, the effects on natural ecosystems are becoming
more evident. A crucial element of this impact is the alteration of vegetation cover, which plays a
significant role in maintaining the ecological equilibrium of our planet.Land serves as the foundation for all human activities and provides the necessary materials for
these activities. As the most crucial natural resource, its utilization by humans results in different
'Land uses,' which are determined by both human activities and the physical characteristics of the
land.
The utilization of land is impacted by human needs and environmental factors. In countries
like India, rapid population growth and the emphasis on extensive resource exploitation can lead
to significant land degradation, adversely affecting the region's land cover.
Therefore, human intervention has significantly influenced land use patterns over many
centuries, evolving its structure over time and space. In the present era, these changes have
accelerated due to factors such as agriculture and urbanization. Information regarding land use and
cover is essential for various planning and management tasks related to the Earth's surface,
providing crucial environmental data for scientific, resource management, policy purposes, and
diverse human activities.
Accurate understanding of land use and cover is imperative for the development planning
of any area. Consequently, a wide range of professionals, including earth system scientists, land
and water managers, and urban planners, are interested in obtaining data on land use and cover
changes, conversion trends, and other related patterns. The spatial dimensions of land use and
cover support policymakers and scientists in making well-informed decisions, as alterations in
these patterns indicate shifts in economic and social conditions. Monitoring such changes with the
help of Advanced technologies like Remote Sensing and Geographic Information Systems is
crucial for coordinated efforts across different administrative levels. Advanced technologies like
Remote Sensing and Geographic Information Systems
9
Changes in vegetation cover refer to variations in the distribution, composition, and overall
structure of plant communities across different temporal and spatial scales. These changes can
occur natural.
A review of the growth of the Israel Genealogy Research Association Database Collection for the last 12 months. Our collection is now passed the 3 million mark and still growing. See which archives have contributed the most. See the different types of records we have, and which years have had records added. You can also see what we have for the future.
2. RATIO ANALYSIS
▸ Ratios are mathematical comparisons of financial statements. The
relationships between the financial statements help investors, creditors,
and internal company management understand how well a business is
performing and areas that need improvement.
▸ Ratios are the most common and widespread tool used to analyse a
business' financial standing. Ratios are easy to understand and simple to
compute. They can also be used to compare different companies in
different industries. Ratios don't take into consideration the size of a
company or the industry. Ratios are just a raw computation of financial
position and performance.
▸ Financial ratios are often divided up into seven main categories: liquidity,
solvency, efficiency, profitability, market prospect, investment leverage,
and coverage.
3. TYPES OF RATIOS
▸ Liquidity Ratios: These ratios show the cash levels of a company and the ability to
turn other assets into cash to pay off liabilities and other current obligations. Assets
like accounts receivable, trading securities, and inventory are relatively easy for
many companies to convert into cash in the short term. Thus, all of these assets go
into the liquidity calculation of a company.
▸ Financial Leverage Ratios: Financial leverage ratios, sometimes called equity or
debt ratios, measure the value of equity in a company by analysing its overall debt
picture. These ratios either compare debt or equity to assets as well as shares
outstanding to measure the true value of the equity in a business. In other words,
the financial leverage ratios measure the overall debt load of a company and
compare it with the assets or equity. This shows how much of the company assets
belong to the shareholders rather than creditors. When shareholders own a majority
of the assets, the company is said to be less leveraged. When creditors own a
majority of the assets, the company is considered highly leveraged. All of these
measurements are important for investors to understand how risky the capital
structure of a company and if it is worth investing in.
4. ▸ Efficiency Ratios: Efficiency ratios also called activity ratios measure
how well companies utilise their assets to generate income.
Efficiency ratios often look at the time it takes companies to collect
cash from customer or the time it takes companies to convert
inventory into cash—in other words, make sales. These ratios are
used by management to help improve the company as well as
outside investors and creditors looking at the operations of
profitability of the company.
▸ Profitability Ratios: Profitability ratios compare income statements to
show a company's ability to generate profits from its operations.
Profitability ratios focus on a company's return on investment in
inventory and other assets. These ratios basically show how well
companies can achieve profits from their operations. Investors and
creditors can use profitability ratios to judge a company's return on
investment based on its relative level of resources and assets.
5. DU PONT ANALYSIS
▸ The Dupont analysis also called the Dupont model is a financial ratio based on
the return on equity ratio that is used to analyse a company's ability to increase
its return on equity. In other words, this model breaks down the return on equity
ratio to explain how companies can increase their return for investors.
▸ The Dupont analysis looks at three main components of the ROE ratio:
▸ Profit Margin
▸ Total Asset Turnover
▸ Financial Leverage
▸ Based on these three performance measures, the model concludes that a
company can raise its ROE by maintaining a high profit margin, increasing asset
turnover, or leveraging assets more effectively.
▸ The Dupont Corporation developed this analysis in the 1920s.
6. ANALYSIS OF DUPONT MODEL
This model was developed to analyse ROE and the effects different business performance
measures have on this ratio. So investors are not looking for large or small output numbers from
this model. Instead, they are looking to analyse what is causing the current ROE. For instance, if
investors are unsatisfied with a low ROE, the management can use this formula to pinpoint the
problem area whether it is a lower profit margin, asset turnover, or poor financial leveraging.
Once the problem area is found, management can attempt to correct it or address it with
shareholders. Some normal operations lower ROE naturally and are not a reason for investors to
be alarmed. For instance, accelerated depreciation artificially lowers ROE in the beginning
periods. This paper entry can be pointed out with the Dupont analysis and shouldn't sway an
investor's opinion of the company.
7. IMPORTANCE OF RATIOS
▸Analysing Financial Statements: Ratio analysis is an important technique of financial statement analysis.
Accounting ratios are useful for understanding the financial position of the company. Different users such as
investors, management. bankers and creditors use the ratio to analyse the financial situation of the company
for their decision making purpose.
▸Judging Efficiency: Accounting ratios are important for judging the company's efficiency in terms of its
operations and management. They help judge how well the company has been able to utilise its assets and
earn profits.
▸Locating Weakness: Accounting ratios can also be used in locating weakness of the company's operations
even though its overall performance may be quite good. Management can then pay attention to the weakness
and take remedial measures to overcome them.
▸Formulating Plans: Although accounting ratios are used to analyse the company's past financial
performance, they can also be used to establish future trends of its financial performance. As a result, they
help formulate the company's future plans.
▸Comparing Performance: It is essential for a company to know how well it is performing over the years and
as compared to the other firms of the similar nature. Besides, it is also important to know how well its different
divisions are performing among themselves in different years. Ratio analysis facilitates such comparison.
8. LIMITATIONS OF RATIOS
▸ Ratios are tools of quantitative analysis, which ignore qualitative
points of view.
▸ Ratios are generally distorted by inflation.
▸ Ratios give false result, if they are calculated from incorrect
accounting data.
▸ Ratios are calculated on the basis of past data. Therefore, they
do not provide complete information for future forecasting.
▸ Ratios may be misleading, if they are based on false or window-
dressed accounting information.
9. COMMON SIZE STATEMENT
▸ Common-size financial statements present the financial statement
amounts as a percentage of a base number. For example, the
common-size income statement will report the revenue and expense
amounts as percentages of net sales. The common-size balance sheet
will report each asset, liability, and owner equity amount as a
percentage of total assets.
▸ Common-size financial statements allow you to compare the financial
statements of large companies with the financial statements of smaller
companies, because you are comparing percentages instead of
dollars. For example, a small retailer can compare her cost of goods
sold (perhaps 78%) to a much larger retailer's cost of goods sold
(perhaps 80%). Similarly, one company's inventory might be 33% (of
total assets) while a competitor's might be 28%.
▸ Common-size financial statements are related to a technique known as
vertical analysis.
10. ADVANTAGES
▸ Easy to Understand: Common-size Statement helps the users of financial
statement to make clear about the ratio or percentage of each individual item to
total assets/liabilities of a firm. For example, if an analyst wants to know the
working capital position he may ascertain the percentage of each individual
component of current assets against total assets of a firm and also the percentage
share of each individual component of current liabilities.
▸ Helpful for Time Series Analysis: A Common-Size Statement helps an analyst to
find out a trend relating to percentage share of each asset in total assets and
percentage share of each liability in total liabilities.
▸ Comparison at a Glance: An analyst can compare the financial performances at a
glance since percentage of increase or decrease of each individual component of
cost, assets, liabilities etc. are available and he can easily ascertain his required
ratio.
▸ Helpful in analysing Structural Composition: A Common-Size Statement helps the
analyst to ascertain the structural relations of various components of
cost/expenses/assets/liabilities etc. to the required total of assets/liabilities and
capital.
11. LIMITATIONS OF COMMON SIZE
STATEMENT▸ Standard Ratio: Common-Size Statement does not help to take decisions since there is no standard
ratio/percentage regarding the change of percentage in the various component of assets, liabilities, sales etc.
▸ Change in Price-level: Common-Size statement does not recognise the change in price level i.e. inflationary
effect. So, it supplies misleading information since it is based on historical cost.
▸ Following Consistency: If consistency in the accounting principle, concepts, conventions is not maintained
then Common Size Statement becomes useless.
▸ Seasonal Fluctuation: Common-Size Statement fails to convey proper records during seasonal fluctuations in
various components of sales, assets, liabilities etc. E.g. sales and closing stock significantly vary. Thus, the
statement fails to supply the real information to the users of financial statements.
▸ Window Dressing: Effect of window dressing in financial statements cannot be ignored and Common-Size
Statements fail to supply the real positions of sales, assets, liabilities etc. due to the evil effects of window
dressing appearing in the financial statements.
▸ Qualitative Element: Common-Size Statement fails to recognise the qualitative elements, e.g. quality of
works, customer relations etc. while measuring the performance of a firm although the same should not be
ignored.
▸ Liquidity and Solvency Position: Liquidity and solvency position cannot be measured by Common-Size
Statement. It considers the percentage of increase or decrease in various components of sales, assets,
liabilities etc. In other words it does not help to ascertain the Current Ratio, Liquid Ratio, Debt Equity Capital
Ratio, Capital Gearing Ratio etc. which are applied in testing liquidity and solvency position of a firm.
12. COMPARATIVE FINANCIAL STATEMENTS
▸A set of comparative financial statements presents a
company’s financial performance for two or more
consecutive periods in side-by-side columns. The
presentation is also referred to as the comparative format
because it allows users to easily compare performance
results from one period to the next without having to look at
multiple financial statements. Both periods’ statements are
shown on a single report.
13. ADVANTAGES OF COMPARATIVE
FINANCIAL STATEMENTS▸ Comparison: The comparative statements show the figures of various firms or
number of years side by side i.e. both for inter-firm comparison and intra-firm
comparison.
▸ Horizontal Analysis: The variables are arranged horizontally for the purpose of
analysis and interpretations of data taken from financial statements for
assessing profitability, overall efficiency and financial position of a firm.
▸ Trend Analysis: The comparative financial statement helps to ascertain the
‘trend’ relating to sales, cost of goods sold, operating expenses etc. so that a
proper comparison can easily be made which helps the analyst to understand
the overall performance of a firm.
▸ Trend and Directions: The comparative financial statement provides necessary
information for comparison of trends in related items e.g. the analyst can
compare the trend of sales with the trend of accounts receivable which gives
very useful information. A 20% increase in accounts receivable and an
increase of sales by only 10% warrants investigation into the reasons for this
difference in the rate of increase.
14. LIMITATIONS OF COMPARATIVE
FINANCIAL STATEMENTS▸Inter-firm Comparison: Inter firm comparison will only be effective if both the firms
follow the same accounting principles, method of valuations of stocks, assets etc.
i.e. all the accounting concepts and conventions, which in real world situation, are
not identically followed by both the firms e.g. Firm A follows the FIFO method of
valuing stock whereas Firm B follows LIFO method for the same.
▸Inflationary Effect: Comparative financial statements do not recognise the change
in prices level and, as such, it will be of no use.
▸Ascertaining Correct Trend: It is very difficult to ascertain the correct trend if there
is a structural changes in a firm which are frequently happened.
▸Supply Misleading Information: Sometimes a comparative financial statement
provides meaningless information, e.g. if a negative amount comes in base year,
and a positive amount in the next year, it is not possible to find out the change in
percentage.
▸Uniformity in Principle: There must be a consistency while following accounting
principles, concepts and convention. But in practice, this is not done and as such,
multi-year analysis becomes useless.
15. TREND ANALYSIS
▸Trend analysis is one of the tools for the analysis of the
company’s monetary statements for the investment
purposes. Investors use this analysis tool a lot in order to
determine the financial position of the business. In a trend
analysis, the financial statements of the company are
compared with each other for the several years after
converting them in the percentage. In the trend analysis, the
sales of each year from the 2008 to 2011 will be converted
into percentage form in order to compare them with each
other.
16. ADVANTAGES OF TREND ANALYSIS
STATEMENTS▸Possibility of making Inter-firm Comparison: Trend analysis helps the analyst to make a
proper comparison between the two or more firms over a period of time. It can also be
compared with industry average. That is, it helps to understand the strength or weakness
of a particular firm in comparison with other related firm in the industry.
▸Usefulness: Trend analysis (in terms of percentage) is found to be more effective in
comparison with the absolutes figures/data on the basis of which the management can
take the decisions.
▸Useful for Comparative Analysis: Trend analyses is very useful for comparative analysis
of date in order to measure the financial performances of firm over a period of time and
which helps the management to take decisions for the future i.e. it helps to predict the
future.
▸Measuring Liquidity and Solvency: Trend analysis helps the analyst/and the management
to understand the short-term liquidity position as well as the long-term solvency position
of a firm over the years with the help of related financial Trend ratios.
▸Measuring Profitability Position: Trend analysis also helps to measure the profitability
positions of an enterprise or a firm over the years with the help of some related financial
trend ratios (e.g. Operating Ratio, Net Profit Ratio, Gross Profit Ratio etc.).
17. LIMITATIONS OF TREND ANALYSIS
STATEMENTS▸ Selection of Base Year: It is not so easy to select the base year.
Usually, a normal year is taken as the base year. But it is very
difficult to select such a base year for the propose of
ascertaining the trend. Otherwise, comparison or trend analyses
will be of no value.
▸ Consistency: It is also very difficult to follow a consistent
accounting principle and policy particularly when the trends of
business accounting are constantly changing.
▸ Useless in Inflationary Situations: Analysis of trend percentage is
useless at the time of price-level change (i.e. in inflation). Trends
of data which are taken for comparison will present a misleading
result.