Report on Personal Financial Ratio Analysis and Comparison

This finance report delves into the analysis of personal financial ratios, providing a comparative study of the student's financial standing against proposed benchmarks. The report begins with an executive summary outlining the key aspects of financial ratio analysis and its significance in evaluating a company's financial performance. The student then presents their personal financial data, including salary, investments, savings, and debt, and calculates relevant ratios such as savings to earnings ratio, savings rate to earnings ratio, and debt to earnings ratio. These ratios are then compared to the proposed financial ratios from an article, with a discussion on the reasonableness of the proposed ratios and their applicability to the student's personal financial situation. The report also explores the limitations of financial ratio analysis, acknowledging the influence of accounting practices and external factors. The student concludes by emphasizing the importance of personal financial ratio analysis for financial planning and achieving financial independence, and how this can be used as a practical tool to analyze personal finances and progressing towards the financial independence. The report includes a bibliography of cited sources.

Running Head: FINANCE
FINANCE
Name of the Student
Name of the University
Author Note

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Executive Summary
The financial ratios are considered as one of the key indicators of company’s financial
performances, which are derived from the income statements, cash flow statements and
balance sheet. This gives the view that whether the company is performing well and whether
there are any area that needs improvements. Therefore, this report includes personal
reflection of the comparison of personal financial ratios with the proposed one, how
reasonable is the proposed ratio and well as main limitations of the financial ratio analysis.
Hence, it can be said that personal financial ratios plays important role in analyzing the
financial situation of individual and planning accordingly so that at the age of retirement, the
person should have sufficient amount of savings.

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Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Comparison of Personal Financial Ratios with Proposed Financial Ratio in Article............3
Proposed Ratio Reasonableness.............................................................................................4
Limitations of Financial Ratio Analysis................................................................................4
Conclusion..................................................................................................................................5
Bibliography...............................................................................................................................6

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Introduction
Financial ratio analysis for the investors relates to the comparison of the line-item
data from the financial statements of the company for revealing the insightsregarding the
profitability, solvency, operational efficiency and liquidity. It is used for looking at the trends
over the time for either one company or for comparing the companies within the industry or
the sector. However, personal financial ratios are used to analyzing own financial standing.
Hence, I would make comparison between my personal financial ratios with the article.
Moreover, I would explain that how reasonable is the proposed ratio to me. Lastly, I would
provide my view regarding limitations of the financial ratio analysis.
Discussion
a)
Comparison of Personal Financial Ratios with Proposed Financial Ratio in Article
I am at the age of 30 years and I have certain incomes and well as expenses.
Following are the data of my personal wealth:
Salary $100,000
Investments $50,000
Annual savings $20,000
Loan $10,000
As per my given data my savings to earnings ratio is $50,000/$100,000 = 0.50, my
savings rate to earnings ratio is $20,000/$100,000= 20% and my debt to earnings ratio is
10,000/$100,000= 0.1
Hence, after comparing my personal financial ratios with the proposed financial
ratios, I can say that my career has been started and I don’t have that much saving as compare
to the proposed example in the article. In the article, the ratios have been proposed from 35

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years to 65 years. In the hypothetical example shown in article at the age of 45, the figure
shows that his savings are low, debt is high and saving rate is low. But in my case, my saving
rate is high and debt is low.
b)
Proposed Ratio Reasonableness
Yes, the ratio that has been proposed in the article is reasonable to me. It is because
planning about future and knowing one’s financial strength is very important for the any
individual, especially for me. This article has given me insights regarding how to plan
regarding personal wealth so that the retirement would be tension free and debt free.
According to the article, in the initial years from 35 years to 45, there would be more debt
and low savings but at the age of 50, one should have the savings that is of worth 4.5 times
more than the wages and is having no more debt than 0.75 of the current wages. Hence, this
would give benefit at the retirement age of 65 years. At this age, the person would be in
position for generating the retirement income of approx 60 percent of his income of pre-
retirement. Hence, this proposed ratio would help me in planning my income accordingly, so
that in retirement, I would be having debt and my savings would be higher.
c)
Limitations of Financial Ratio Analysis
In my view, ratios are based according to the figures of accounting that are given in
financial statements. These accounting figures are subject to the diversity in the practices or
manipulations, approximations as well as deficiencies. Hence, the ratios that are based on this
would not draw the reliable conclusion. It has the problem of comparability. The different
employed methods of the accounting cause the problems for the comparison of certain key
relationships. The ratios of accounting are not dependable totally and it should be used after

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giving the due weight such as industry situations, firms’ situations within industry and so on.
The utility of the financial ratios analysis are also affected by the inflation. I have also
observed that if someone is computing ratios by different methods then it also affects the
accounting ratios utility. However, personal financial ratios have also certain limitations.
These ratios are not meant for the substitute for the individual advice or the account for every
specific variation in the financial lives of people.
Conclusion
Therefore, I conclude from my analysis on the article that analysis of the personal
financial ratios is quite important for industry of financial services. Although, the analysis of
personal wealth ratio suffers from certain limitations, but its advantages over weights its
limitations. This helps in simplifying the complexity of the calculations and presenting to the
clients, the materials that would be easily understood by them. Moreover, I have understood
the reasonableness of the proposed article, which would be helping me with the practical tool
to analyze my personal finances and progressing towards the financial independence.

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Bibliography
Dahmen, P. and Rodríguez, E., 2014. Financial literacy and the success of small businesses:
An observation from a small business development center. Numeracy, 7(1), p.3.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Farrell, C. (2019). Personal Financial Ratios: An Elegant Road Map to Financial Health and
Retirement. [online] Available at: https://strike.coloradolinux.com/~sjg/FPA-
Personal_Financial_Ratios.pdf [Accessed 22 Aug. 2019].
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Lim, H., Heckman, S., Montalto, C.P. and Letkiewicz, J., 2014. Financial stress, self-
efficacy, and financial help-seeking behavior of college students. Journal of Financial
Counseling and Planning, 25(2), pp.148-160.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific
Book Chapters, pp.109-169.