BUSI 2503 Introduction to Finance: Ratio Analysis and Challenges

This assignment solution for BUSI 2503 Introduction to Finance discusses financial ratio analysis, identifying three potential users of financial ratios (equity shareholders, business profitability analysts and efficiency analysts) and explaining their focus. It also addresses two difficulties an analyst might encounter when comparing ratios of similar corporations from different countries, such as the use of different Generally Accepted Accounting Principles (GAAPs) and differences in key markets or economies. The solution references various sources to support its explanations of return on equity, profit margin, asset turnover, and challenges in financial statement comparison.

Solution of Question No. 1:
(i) Three financial ratio is as follows:
Return on Equity:
Equity return are those which the company earns for the equity shareholders from the
amount retained by it from the earnings available to equity shareholders. It can be
calculated using the following formula:
Profit Margin:
It is part of profitability ratio which indicates profitability of business. It indicates
percentage of profit over sales. Which can be calculated using the given formulas:
Asset Turnover:
It indicates how asset is generating revenue. It can be termed as efficiency ratio it
shows how much sales is generated from its asset. It can be calculated by comparing
company’s net sales with its average total assets. The formula for calculation is as
follows:
Return on Equity =Net Profit/ Equity
Profit Margin =Net Profit/ Sales
Asset Turnover = Sales/ Average Total Assets

(ii) Two Major Difficulties are as follows
a) One of the major difficulties is the use of different GAAPs (Generally Accepted
Accounting Principles)
The GAAPs used for the preparation for financial accounts affects the relative
comparison among financial figures.
b) Difference in key markets or economies
For example, the French domestic steel market is having great importance for
Usinor and on the other hand UK market is equally important for British Steel.
References:
[1] Financial Ratio Analysis, (cited on 07.02.2019), (Available from
myaccountingcourse.com) https://www.myaccountingcourse.com/financial-ratios/asset-
turnover-ratio
In-text- citation: The asset turnover ratio is ratio of sales and average total assets.
[2] Financial Analysis, (cited on 07.02.2019), (Available from investopedia.com)
https://www.investopedia.com/financial-analysis-4427788
In-text- citation: Return on equity is return to equity holders as percentage of net profit
divided by equity.
[3] Boundless Finance, ( cited on 07.02.2019 ), (Available from lumenlearning.com),
https://courses.lumenlearning.com/boundless-finance/chapter/additional-detail-on-
present-and-future-values/
In-text- citation: It shows calculation of future value as well as present value.
[4] Effective Annual Interest, ( cited on 07.02.2019 ), (Available from corporate finance
institure.com), https://corporatefinanceinstitute.com/resources/knowledge/finance/
effective-annual-interest-rate-ear/
In-text- citation: It states major difficulties while comparison of financial statements.
[4] Mark Whittington Warwick Business School, Coventry, UK, Mark Whittington
Warwick Business School, Coventry, UK ( cited on 07.02.2019 ), (Available from

semanticscholor.org),https://pdfs.semanticscholar.org/0e5d/44fba1e79e495af17192f1e4
7b4ab53ab592.pdf
In-text- citation: It shows calculation of effective annual interest using given formula.