¶ … financial ratio analysis, a tool that shows how figures between the balance sheet and the income sheet are related. Ratios are used to appraise a company's past financial performance and its potential for the future. A company's financial statements are of interest to creditors, investors, financial analysts and internal accountants. Using ratios helps them to analyze the overall financial health of a business. By computing financial ratios, one is better able to evaluate a company's financial status and operating performance for a given time period.
Here are some of the advantages of ratio analysis:
It simplifies the comprehension of financial statements.
It facilitates comparisons between firms.
It highlights the factors associated with strong firms and weak firms.
It provides a helpful tool in investment decisions.
Here are some limitations of ratios analysis:
It is susceptible to personal bias by the people interpreting them.
It analyzes historical data, making its predictive value limited.
Financial ratios are classified according to the information they provide. The following list includes some typical categories:
Liquidity measurement
Debt ratios
Profitability indicators
Investment valuation ratios
Ratios are used for a number of measuring techniques to analyze the financial health of a business, including industry comparison and trend analysis. For industry comparison purposes, a company's ratios are compared with those of similar companies or with industry norms to gauge how well the company is doing relative to its competitors. With trend analysis, a company's current year ratios are compared with its previous ratios to determine if the company's financial condition is improving or deteriorating. When analysis uncovers a problem, an attempt should be made to discover the reasons for the change.
Horizontal analysis is used to appraise the trend in accounts over the years, and may also be carried out by computing trend percentages that state several years' financial data in terms of a base year. Companies typically report comparative financial data for five years in their annual reports. Comparative balance sheets make it relatively easy to spot trends that require additional investigation.
Vertical analysis uses the biggest...
This means that Apple is generating more cash internally than Google. Further, given the increase in cash flows from operations in the case of Apple means that the company could have an enhanced value of net income in future. When it comes to cash flows from investing activities, there is an increase in the same in the case of Apple in the current financial year in comparison to the
Financial Ratios of a Prospective Borrower Financial ratio analysis is a quantitative tool used to analyze financial standing of a business entity. The ratio analysis can also be used to compare financial capabilities of companies in different industries. This paper discusses how financial ratios can be used to answer questions about the management, marketing, and production capabilities of a prospective borrower. The paper also identifies ratios that demonstrate management competency
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