Ratio Analysis and Financial Statement Analysis : Assignment

Added on - 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.Financial statements are essential for the internal and external investors of the companyever all the stakeholders have their different tastes like equity shareholders are interested in the growth ofthe dividend payment. This course also provides the quiz after the topic finished for better knowledge ofthe ratios and understanding.Keywords-T/O- This short-form denotes to the company's turnoverROE- ROE means a return on equity that is used to show the investor's return on their stockholding.RONA- This short form is used to show the companies performance in finance which determinesthe use of assets in the financial statement. The return on net assets reflects the higher proportionthat means using the assets and net working capital efficiently and effectively.EAT- Earning after tax is used to show a company's profitability. This term reflects the earningexpressed in percentage of revenues.
4Course TopicsPE ratio= Price earning ratioPB ratio= price to book ratioIntroductionFinancial statement analysis determines the performance of management namely profitability, efficiencyand risk. Financial statement classified in three analysis that can be:Vertical analysisHorizontal analysisRatio analysisVertical analysis:Vertical analysis is known as a common size statement analysis compares to all items. This is atechnique used to identify the resources where to apply the resources. The distribution ofresources in varied proportions has applied determines the measure of the relative performanceof the income statement.The income statements each item are expressed as a percentage of sales. Balance sheet items alsobalanced with twofold aspect. Total assets= Total liabilities.Vertical analysis – Balance sheetThese analyses manage the balance sheet and consider various items in the total assets and totalliabilities percentages.
5Course TopicsHorizontal analysisThis analysis compares the income statement and balance sheet; both financial statementsdetermine the changes, the absolute change along with percentage changes. This techniqueevaluates the trends within time by computing the proportion, the percentages increase ordecrease with the base year. The accounts calculated interlinked with different dates usingdifferent purchasing powers.Ratio analysis of financial statements helps to identify the changes in the financial statementssituation. The individually separate ratio is not adequate to judge the situation of the company.Various ratios used to evaluate the financial statement with each other. This comparative analysisof ratios is most important in financial analysis. The ratios are variables in analysis and notabsolute measurements. The awareness is required to avoid the errors in conclusions. This is thefollowing ratios discussed below:Solvency RatioSolvency 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 ratioLiquidity 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)
6Course TopicsOperational EfficiencySome ratios help to analyze efficiency.This ratio specifies the standard use where the companycollects the cash from the clients for credit goods and services. The main aim of this ratio is tomeasure day to day performance of the company in its operation from trading concern to theselling department to make profits.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 helps to analyze the firm's ability to translate sales to profit.Valuation RatioValuation ratios are for the company's investors, it helps them to measure whether the share to bepurchase, hold or sell. Using these ratio investors can also be able to forecast the future of theshares and stock and the expected returns from the stockTypes 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:
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