Financial Analysis: Steps and Reports for Competitor Evaluation

This report outlines the steps involved in conducting a financial analysis of a competitor, focusing on the utilization of financial ratios and various financial statements. The process includes selecting relevant information, calculating key ratios (e.g., current ratio, gross profit margin), comparing these ratios with the competitor's, and interpreting the results to draw meaningful conclusions. The report emphasizes the importance of income statements for profitability analysis, balance sheets for assessing liquidity and leverage, and cash flow statements for evaluating cash flow status. By following these steps and utilizing the appropriate reports, a comprehensive financial evaluation of the competitor can be achieved. Desklib provides a platform to access similar solved assignments and past papers for students.

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Task 3
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1TASK 3
Business of the competitor can be analysed through ratios using the ratio formula and
various financial statements. Usage of the financial ratio is the time tested techniques of
analysing the financial performance. It is one of the most common and useful method of
evaluating and comparing the financial statements. Further, it provides useful conclusions as
compared to other techniques for analysis (Ak et al. 2013).
Steps involved in ratio analysis are as follows –
 In the 1st step the analyst shall select the relevant information for the purpose of
making decision under the consideration. The information for computing the ratios
will be taken from the financial statements (Delen, Kuzey and Uyar 2013).
 In the 2nd step the required ratios shall be calculated using the proper numbers and
formula. For example, current ratio is calculated through dividing the current assets
by current liabilities for analysing the liquidity position and gross profit margin is
computed through dividing the gross profit by sales.
 In the 3rd step the calculated ratios will be compared with the ratios of the competitor.
It will enable the analyst to compare the performance of the company as good or bad
as compared to its competitor (Delen, Kuzey and Uyar 2013).
 4th and final step requires interpretation of ratios and drawing of conclusions. The
conclusions will be drawn after comparing the result of the company with the
competitor and based on the result recommendation is provided, if required.
With the help of the ratios the financial statement can be evaluated in clearer manner
and the required decisions can be made. The major point is that the ratio determines
quantitative relationship which in turn van be used for making qualitative judgements.
Reports used for computing financial ratios are as follows –

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Income statement – it is the financial statement used to analyse the financial performance of
the company over the specific period of time, generally a year. Company’s profitability
position can be assessed through analysing the revenues generated by the company and
expenses incurred for operating as well as non-operating activities (Brigham et al. 2016).
Profitability position of the company can be computed and compared through calculating the
net profit margin ratio, gross profit margin ratio and operating profit margin ratio.
Balance sheet – it is the financial statement that includes the liabilities, assets and equity.
Using the balance sheet the analyst can check the amount of debt, amount of debt, capital
structure of the company and assets of the company at particular point of time. Liquidity
position and leveraged position of the company can be computed and compared through
calculating the current ratio, quick ratio, debt equity ratio, debt ratio using the balance sheet
information (Weygandt, Kimmel and Kieso 2015).
Cash flow statement – it is the financial statement that records the data regarding cash
inflows as well as outflows from various activities like operating activities, investing
activities and financing activities. Cash flow status of the company can be analysed through
computing operating cash flow ratio, long term debt coverage ratio and interest coverage ratio
using the cash flow statement information (Weil, Schipper and Francis 2013).

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Reference
Ak, B.K., Dechow, P.M., Sun, Y. and Wang, A.Y., 2013. The use of financial ratio models to
help investors predict and interpret significant corporate events. Australian journal of
management, 38(3), pp.553-598.
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios:
A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.