Paper Ratio and Financial Statement Analysis
Benefits and Limitations of Ratio and Financial Statement Analysis
July 25, 2013
MGMT640
Executive Summary
In corporate finance, both ratio and financial statement analysis are important tools that can be used in order to assess a company’s strength financially. They can be used in order to forecast a business’ prospective cash flow and ability to grow in the future, as well as a company’s strengths and weaknesses. Income statements, balance sheets, the statement of retained earnings, and the statement of cash flows are the four primary types of financial statements used in corporate finance. All of these financial statements serve to analyze a firm’s cash flows from different perspectives and are all interrelated. Ratio analysis, another important tool in financial analysis, analyzes the probability that a firm will be profitable or not. The different kinds of ratios used are liquidity ratios, efficiency ratios, leverage ratios, profitability ratios, and market-value indicators, with each type including various different specific ratios that one can calculate when examining a firm’s operability. Both the financial statements and ratio analysis offer an analysis of a firm’s finances at a particular point in time, while also forecasting its financial stability in the future. Another advantage is that they allow a firm’s finance team to compare its finances to that of other similar companies, known as benchmarks, in order to value the strength of their firm in the marketplace. However, financial statements and ratio analysis can also lack in their accuracy since financial analysis is often based on historical figures from the past several years and thus only offer the prospective financial future rather than concrete data since often a firm’s finances are based on the ever-changing marketplace or other factors not in control of the firm’s managers, such as economic conditions.
July 25, 2013
MGMT640
Executive Summary
In corporate finance, both ratio and financial statement analysis are important tools that can be used in order to assess a company’s strength financially. They can be used in order to forecast a business’ prospective cash flow and ability to grow in the future, as well as a company’s strengths and weaknesses. Income statements, balance sheets, the statement of retained earnings, and the statement of cash flows are the four primary types of financial statements used in corporate finance. All of these financial statements serve to analyze a firm’s cash flows from different perspectives and are all interrelated. Ratio analysis, another important tool in financial analysis, analyzes the probability that a firm will be profitable or not. The different kinds of ratios used are liquidity ratios, efficiency ratios, leverage ratios, profitability ratios, and market-value indicators, with each type including various different specific ratios that one can calculate when examining a firm’s operability. Both the financial statements and ratio analysis offer an analysis of a firm’s finances at a particular point in time, while also forecasting its financial stability in the future. Another advantage is that they allow a firm’s finance team to compare its finances to that of other similar companies, known as benchmarks, in order to value the strength of their firm in the marketplace. However, financial statements and ratio analysis can also lack in their accuracy since financial analysis is often based on historical figures from the past several years and thus only offer the prospective financial future rather than concrete data since often a firm’s finances are based on the ever-changing marketplace or other factors not in control of the firm’s managers, such as economic conditions.
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