Financial Statement Analysis Assignment | Ratio Analysis

Added on - 16 Oct 2019

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2Course TopicsOverviewHow to do ratio analysis for financial statements?Financial statement analysis use ratio analysis formulas to draw a meaningful interpretation ofthe data given in financial statements. This analysis helps investors to adopt a user-orientedapproach rather than traditional proprietary approach. Considering the various types of ratioshelp investors to easily obtain the data from some ratios. This course aims to learn how to doratio analysis for the financial statement. This course first covers the meaning and definition ofratio analysis in the introductory part and next to the various types of examples of financialratios. This course focuses on the purpose of the financial statement that is to evaluate itsperformance in management's profitability, risk, and efficiency. The importance of ratio analysisis to access the financial statement and analyze it. This analysis compares the company’s trendswith others over a specific period.A ratio measures the relationship between two financial figures. In this corporate finance world,ratios specify the company's standard performance and help the investors and managers toanalyze the operations. The ratios may be classified according to the financial statement on thebasic leading categories from which the ratios are derived.Balance sheet ratiosRevenue statement ratiosCombined ratiosThe ratio measures the relationship between two financial figures. Considering an example ifthere are four cell phones and two calculators, now it can be said that cell phones and calculators
3Course Topicsare in the ratio of 4:2. This shows that there are four cell phones for every two calculators. In thecorporate world of finance, ratios show the performance of companies. Ratio analysis helps theinvestors and managers to analyze the various ratios and sustainability of the operations.Ratios are used to simplify financial statement ratios. Without understanding the whole financialstatement ratio analysis helps the investor to obtain the information of a few data from the ratios.Detection of problematic trend the analysis can also forecast the future performance of acompany. The profile of the company's business based on the geographical location where thecompany operates, the category of product and services it provides, target customers, etc. Next isfinancial profile included the size of the company, the upper limit to lower limit, etc. thecomparison in between companies through the implication of the ratios and that ratios can be PEratio, PB ratio. TheIntroductionFinancial statements are essential for the internal and external investors of the company ever all thestakeholders have their different tastes like equity shareholders are interested in the growth of thedividend payment.ProfitabilityProfitable return on assets ratio and return on equity ratio help to the shareholders or the stakeholders tounderstand how many firms can generate the earnings. Return on assets means the total net incomedivided by total assets. the margin rate help to analyze the firm's ability to translate sales to profit.Operational efficiencySome ratios help to analyze the efficiency. ratios
4Course TopicsVertical analysis:Vertical analysis is known as a common size statement analysis compares to e.Horizontal analysisThis analysis compares the income statement and balance sheet, both financial statementsdetermine the changes, the absolute change along with percentage changes.Vertical analysisThis is a technique used to identify the resources where to apply the resources. The distributionof resources in varied proportion has applied the determines this determine theVertical analysis- income statementTo measure the relative performance of the income statement.Vertical analysis – balance sheetThese analyses manage the balance sheet and consider various items in the total assets and totalliabilities percentages. ThisHorizontal analysisThis technique is used to access the trends relative proportion to a base year.Trend analysis
5Course TopicsTypes of financial statement ratiosSolvency ratios:Solvency ratios show companies feasibility on a long term basis. The comparison of debtmeasures its earning, equity and assets. This analysis classified into two subcategories:1)Liquidity ratio and2)Turnover ratioExamples of solvency ratios are:According to its name debt –to- equity ratio shows its relationship with debt taken by thecompany to equity. The proportion of fundraising from banks and creditors compared to the fundfrom the investors. Debt -equity =DebtsEquityshareholdersfundThis ratio depicts that lower the ratio of debt-equity, higher the company's position. The fundtaken from the company's shareholders and investors is always better than the fund from banksand creditors.Liquidity ratios:
6Course TopicsLiquidity ratios indicate the cash available to business and its ability to meet current dues.Liquidity ratios are an indicator of a company's capacity to clear its current liabilities (liabilitiesneed to be cleared in the year)Liquidity ratio examples are discussed belowQuick ratio =QuickassetsQuickliabilitiesQuick assets= cash and cash equivalent + account receivable.Cash= $ 200Account receivable= $ 400Current liabilities= $1000Quick ratio =200+4001200= 0.5This ratio is also known as an acid ratio. A large amount of stock and prepaid expensesCurrent ratio =CurrentAssetsCurrentliabilitiesThe current ratio is usually used to analyze the liquidity of a firm. It is a very quick and easyanalysis in measurement to understand the relationship between current assets and currentliabilities.The current ratio provides the estimate for the survival of the company whether it would survivefor one year or not. When the current assets are more than the current liabilities, the company
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