Financial Ratio Analysis
Financial Ratio Analysis
-As changes in a company’s several accounts change, it is hard to just casually inspect statement of earnings and balance sheets. Many items fluctuate simultaneously, making the reasons for the fluctuations hard to determine.
-Financial Ratio Analysis is a useful management tool developed to assist in indentifying, interpreting and evaluating changes in the financial performance and condition of a business over a period of time. Its purpose is to provide information about the business entity for decision making by external (creditor use ratio analysis in making lending decisions) and internal (potential shareholder’s investing decision and also gives firm’s manager info. Required to make a variety of operating and financing decisions)
-Ratios are grouped according to the five basic financial goals: profitability, efficiency, liquidity, stability and growth
Profitability- generation of revenues in excess of the expenses associated with obtaining the revenues during a given time period. Net earnings in the “bottom line” test of how successful the firm’s management has been.
Efficiency – in business means the efficient use of assets. It has an impact on profitability, stability, liquidity and ability of the enterprise to grow.
Liquidity- a business’s ability to meet its short-term obligation; such as if a company ties up all its cash in inventory and equipment, leaving it not able to pay employees or creditors on time, that company can be forced into bankruptcy
Stability- a business’ overall financial structure; if the owner invests too little money into the firm as possible and finances it through debt, it could go bankrupt if the creditors want money back
Growth- increasing operations in size or acquiring more assets
-Financial analysts assess a firm’s progress toward a satisfactory return on investment and sound financial position
-Profitability and efficiency/ investment utilization are associated with return on investment
-As changes in a company’s several accounts change, it is hard to just casually inspect statement of earnings and balance sheets. Many items fluctuate simultaneously, making the reasons for the fluctuations hard to determine.
-Financial Ratio Analysis is a useful management tool developed to assist in indentifying, interpreting and evaluating changes in the financial performance and condition of a business over a period of time. Its purpose is to provide information about the business entity for decision making by external (creditor use ratio analysis in making lending decisions) and internal (potential shareholder’s investing decision and also gives firm’s manager info. Required to make a variety of operating and financing decisions)
-Ratios are grouped according to the five basic financial goals: profitability, efficiency, liquidity, stability and growth
Profitability- generation of revenues in excess of the expenses associated with obtaining the revenues during a given time period. Net earnings in the “bottom line” test of how successful the firm’s management has been.
Efficiency – in business means the efficient use of assets. It has an impact on profitability, stability, liquidity and ability of the enterprise to grow.
Liquidity- a business’s ability to meet its short-term obligation; such as if a company ties up all its cash in inventory and equipment, leaving it not able to pay employees or creditors on time, that company can be forced into bankruptcy
Stability- a business’ overall financial structure; if the owner invests too little money into the firm as possible and finances it through debt, it could go bankrupt if the creditors want money back
Growth- increasing operations in size or acquiring more assets
-Financial analysts assess a firm’s progress toward a satisfactory return on investment and sound financial position
-Profitability and efficiency/ investment utilization are associated with return on investment