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Financial ratios essay
Roles in financial ratios
Financial ratios essay
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Introduction An important part of financial planning for corporations is the annual report. Publically held companies are required to submit an annual report to the SEC and private companies, even though not required, can use an annual report to gauge the performance of the company for the past year and use the report to plan for the future. The financial statements that make up an annual report are the income statement, the balance sheet, and the statement of cash flows. (Melicher, 2014) Once all of the financial information has been compiled and the three statements that make up the annual report have been completed a corporation can then start to analyze the data. There are several different categories of financial ratios …show more content…
The purpose of an income statement is to report the revenue generated and the expenses incurred by a corporation for the past year. (Melicher, 2014) The gross revenue is the first item on the financial statement followed by several expenses and then the net revenue. One of the expenses a corporation incurs is the cost of goods sold, which is the amount of money it costs a corporation to produce or manufacture the items sold to generate a profit. The second expense on a financial statement is the cost of record keeping, preparing financial statements, advertising, and salaries grouped under the heading “Selling, general, marketing expenses”. The other expenses on an income statement are depreciation, interest expense, and the unavoidable income tax. (Melicher, 2014) Once all of these expenses haven been deducted from the gross revenue a company has an accurate depiction of their net …show more content…
The collection of these three financial statements identifies the financial position of the corporation to help identify the way forward financially for the company. Once all of the data has been collected for the annual reporting the corporation can analyze the data through the different financial ratios including the liquidity ratio, the asset management ratio, and the profitability ratio.
References
Candor Equities Limited. 2012. “Types of Financial Ratios”. Investing Fundamentals Candor Equities Limited Online. http://cel.candor-holdings.com/wp-content/uploads/2013/10/types_of_financial_ratios_19mar_2012.pdf. (Accessed 11 October 2015)
Melicher, Ronald W. and Norton, Edgar A. 2014. "Introduction to Finance: Markets, Investments, and Financial Management. 15th Edition". New Jersey: John Wiley and Sons,
The first method we will review is the accounting method. Through this accounting approach we will analyze specific ratios and their possible impact on the company's performance. The specific ratios we will review include the return on total assets, return on equity, gross profit margin, earnings per share, price earnings ratio, debt to assets, debt to equity, accounts receivable turnover, total asset turnover, fixed asset turnover, and average collection period. I will explain each ratio in greater detail, and why I have included it in this analysis, when I give the results of each specific ratio calculation.
Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and stockholder’s equity (what is left over for the owners) (Fundamentals of Financial Accounting, 2006, p.7). The Income Statement shows whether a business made a profit (net income) during a specific period of time (Fundamentals of Financial Accounting, 2006, p. 10). The Statement of Retained Earnings illustrates what portions of the company’s earnings was paid to stockholders and retained by the company for future operations (Fundamentals of Financial Accounting, 2006, p.12). Finally, the Statement of Cash Flows reports summarizes how a business’ “operating, investing, and financial activities caused its cash balance to change over a particular range of time” (Fundamentals of Financial Accounting, 2006, p.13).
The report will give an overview of each company, an explanation of what type of companies we are analyzing, the purpose of each company in terms of its goals and objectives, the products and services each company produces, and what future prospects we see these companies having. The reader should gain an understanding of each company as well. We also analyze the type of industry these companies are competing in. This will help us understand where each company fits in the marketplace. This is important because it places the two companies into a broader picture. The most important part of the financial report is the financial statement analysis. In this, the annual report of each company was analyzed. It studies the firms’ past earnings to understand their operating performances. It also forecasts future profitability and risk (short-term and long term). The financial statements give information on how these risks affect expected return. In the end, the reader will have an understanding of the two companies, the industry in which they operate, its financial standing in the past and present, and future profitability.
Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as the only possibilities. However, when used in conjuncture with various other business evaluation processes, financial ratios are invaluable. By examining Ford Motor Company's financial ratios, along with a few other company factors, this report will give a clear picture of how the company is doing now and should do in the future.
Information from the income statement and the balance sheet are used to calculate financial ratios that are useful when making investment decisions.
Important factors of a company’s outlook are its financial strength and weaknesses. These factors can be evaluated by reviewing the firm’s financial statements and using ratios to help measure a company’s liquidity, leverage, activity, profitability, and growth. Financial ratios are computed by using the information found in a company’s financial statements: primarily income statement and balance sheet. The calculations from the current year, previous years, and other companies in the industry are used as a basis to identify and ev...
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Financial statements are formal records that represent the financial activities of any business entity. Financial records are used to calculate the performance, financial strength and liquidity of a company. There are four basic types of financial statements:
Information on the financial statement can offer an overview of a company’s performance over the past fiscal year. However, gaining crucial investment insights requires financial manipulation that yields financial ratios.
Financial Statements In this paper, the three major types of financial statements will be discussed. The three major types of financial statements are income statement, balance sheet, and cash flow statements. It will also talk about owners’ equity. The paper will also touch on some key points in each of the three types of financial statements and owners’ equity.
Ratio analysis is a widely used of financial analysis. It is defined as the systematic use of ratio so that the financial statements can be interpret to find a firm’s strengths and weakness as well as its historical performance and current financial condition. Ratios reveal the relationship in a more meaningful way so as to enable us to draw conclusions from them.
Financial statements can be broadly analyzed through ratio analysis. A ratio of selected values on an enterprises financial statement is financial ratio. To evaluate the overall financial condition of a corporation or other organization there are standard ratios are used. The market price of the shares is used in regular financial ratios if division in a company traded in a financial market. The values are taken from the balance sheet, cash flow statement, income statement and retain earning statement for the purpose of analyzing the financial ratios.
Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the stockholders.
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
Business owners’ use at least four major financial statements to keep a grasps on their company 's finances during a specific time frame. Financial statements are usually completed monthly, quarterly, semiannually and annually. The major financial statements include the statement of cash flows, the statement of stockholder 's equity, the balance sheet, and the income statement. Each one provides a different awareness into a company 's financial status in the stated period.