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ACCOUNTING AND FINANCIAL ANALYSIS
Ratio analysis provides a way of summarizing a large volume of accounting information into simple financial measurements.
These ratios can be used to monitor a firms financial performance compared to previous accounting periods, or may be used to check how well the firm is doing compared to its competitors.
Various types of financial ratios may be computed, for example, profitability, liquidity, etc.
However, no single ratio will provide a complete overview of a firms financial health, or serve all types of users of financial statements. The ratios need to be blended together to give an overall picture of the firms financial health.
What is Ratio Analysis?
Ratio analysis has been developed primarily to satisfy the requirements of the different users of financial statements. Identifying such users is necessary because this affects the techniques of analysis employed.
Typical users of financial statements are:
Investors or shareholders
Investors or shareholders are primarily concerned with receiving adequate return on their investment, but it must provide both security and liquidity. ...
Others
Bank managers, financial institutions, professional advisers to investors, financial journalists, commentators and tax authorities are interested in the liquidity and/or profit potential and/or ownership of the corporation.
What is Ratio Analysis?
The use of accounting ratios has been developed in order to provide various interested parties with a method of measuring the strengths and weaknesses of a corporations financial position. Accounting ratios are merely a means of presenting information in the form of a ratio or percentage. They assess, in a simplified form, the trading results and financial condition of the corporation as shown by the financial statements. ...
Types of Accounting Ratios
Accounting ratios may be split into five generic types:
§ Profitability Ratios
§ Liquidity Ratios
§ Efficiency Ratios
§ Gearing Ratios
§ Investors Ratios
(1) Profitability Ratios
Profitability ratios focus on a firms earnings. They are used to compare and analyze reported financial performance in the income statement. ... ExampleA firm that earns a net profit of USD 15m in an accounting period has average total assets of USD 100m. ... Average working capital is calculated by adding the opening and closing working capital figures for the accounting period and dividing by 2. ...
A falling collection period is generally an indication of effective financial control, but it could also reflect a desperate need for cash, involving extra discounts for cash and undue pressure on customers. ... It is calculated as:
The accounts payable period can also be expressed in terms of the number of times a firm turns over its accounts payable during the accounting year:
Example
A companys cost of sales is EUR 100m and its average accounts payable stand at EUR 12m.
Approximate Word count = 4487
Approximate Pages = 17.9
(250 words per page double spaced)
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