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Essentials of Financial statement Analysis
Role of financial ratios
Role of financial ratios
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information and may not be enough to meet present and future needs of a company. Many companies are unique in size, operation, location, and management. Thus, comparing the companies in same industry with such uniqueness might not provide useful comparable information. For example, comparing a company renting its plant and a company purchasing its own assets will be irrelevant in terms of financial analysis. Some companies might increase the current ratio by increasing the debt before the year-end in order to make their balance sheet look better for that year. Thus, ratio analysis doesn’t reflect the company’s tricky activities during ratio calculations and financial analysis by using different ratios. Since the financial ratios are just numbers …show more content…
This topic is important because it helps to create the company’s ratio analysis, with the application of financial statements, provides guidance about company’s financial and operational status as well as the strengths and weaknesses. This is important to health care organization because it help to evaluates the past performance, present condition, and prospects, it also aids in company’s planning, controlling, forecasting and overall decision making processes. Due to its simplicity and flexibility, ratio analysis is most useful tool in analyzing company’s status and prospects, therefore, if used properly by considering the limitations and taking precautions, ratio analysis will provide the maximum benefits to the users. Recommendations Ratio and financial statement analysis is the simplest method because the financial statements are broken down into ratios. However, due to the limitations of ratio analysis, some precautions that are necessary are mentioned below. 1. Even though, financial statement analysis is simple and widely used tool, every users should have minimum knowledge of accounting and the calculation to obtain certain ratios. 2. Investors should analyze financial statements rather than going by ratios before investing in companies or businesses. 3. Knowledge is always useful and it is better to seek advice from financial professionals for those users who are not familiar and are not able to analyze information from financial
When comparing the debt-to-assets ratio of McDonalds and Wendys, you have to divide the firms total liabilities by their total assets. Essentially, the debt-to-assets ratio is the primary indicator of the firms debt management. As the ratio increases or decreases, it indicates the firms changing reliance on borrowed resources. The lower the ratio the more efficient the firm will be able to liquidate its assets if operations were discontinued, and debts needed to be collected. In 2005 Wendy's had $2,076,043 worth in total assets and $846,264 in total liabilities. When divided, Wendys has the lower ratio of the two competitors at 40%. This means that they would take losses of 40% if operations were shut down, and the cash received from valuable assets would still be sufficient to pay off the entire debt. It also means that 40% of Wendys assets are made through debt. McDonalds in 2005 had $12,545.3 (in millions) of total liabilities and $22,534.5 (in millions) of total assets. After doing the math, McDonalds ends up with a ratio of 56% which is higher than Wendys by sixteen percent. This means that there is more default on McDonalds liabilities, which can be a costly event from lenders perspective. McDonalds makes 56% of all its assets through debt. In reality, its not good to have a debt-to-assets ratio over 50%. Its also not good to have a debt-to-assets ratio that is too low because...
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories, profitability, asset utilization, liquidity and debt utilization ratios. The ratio analysis covered here consists of eight various ratios with at least one from each of these main categories. These ratios were used to compare and contrast the performance of Verizon versus AT& T over the years 2005 and 2006.
This ratio helps in analysing the position of the company to satisfy its short term debts within a period of one year. The higher the current ratio would be the more the company will be in position to satisfy its short term debts.
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.
Organizations use financial statements and ratio analysis assess financial performance viability. The ratio analysis are used to identify trends and to perform organizational comparison (financial) with other companies within same industry. Ratio analysis, using data reported on the financial statements, are divided into five major categories: common size, liquidity, solvency, efficiency, and profitability. This paper will assess the financial stability of John Hopkins Hospital (JHH) using the five ratio analysis.
Risk in a health care organization is the main focus of the health care organization through frugal search of solvency ratios. The purpose of solvency ratios is to take a long-term view. Additionally, it is to help determine if the organization has overextended itself throughout use of financial leverage. At times, these ratios can be referred to as leverage or capital structure ratios. Three common types of solvency ratios consist of “interest coverage ratio, debt service coverage ratio and “long-term debt to net assets ratio”. They all each compare one item to another and to determine if any risk involved. Nevertheless, has helpful the solvency ratios are the carefulness should be advised for improvement. From the creditor’s and organization’s standpoint, it varies if the organization needs improvement on risk and profits. If charity care helps expenses, but hurts profits the overall interest coverage ratio would be lesser. The debt service ratio coverage is to build interest coverage ratio and give broader complete look at the organizations ability to pay its long-term debt. The process requires to pull information from statement of operations and st...
I will be comparing five types of financial ratios through statement of comprehensive income and balance sheet, as follows:
... show that the company is growing and expanding, property and inventory, as a percentage of assets, should be increasing instead of decreasing. More property and inventory, if it is not owned by creditors, would also decrease their debt to total assets ratio.
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.
Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.
Monea, M. (2009). Financial ratios – Reveal how a business is doing? Annals of the University Of Petrosani Economics, 9(2), 137-144. Retrieved from http://www.upet.ro/eng
I have leant that ratio analysis offers better insight of a company’s financial position on the short-term and long-term basis. However, I would recommend that investor advice should be based on ratio analysis that considers ratios from several years. This will ensure that the investor is making an informed decision based on the company’s financial ratio performance trend.
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound.
Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions.
The healthcare industry of the Bahamas is divided into two sectors, public and private health care. There are five hospitals, which includes two private hospitals and three public hospitals, and numerous public community clinics along with the many private facilities through which medical services are rendered (Doctors Hospital, 2009). The Princess Margaret Hospital, which is the main public facility, according to Smith (2010) in 1905 was people’s last choice when seeking medical attention. Smith described the then hospital as being partitioned into four areas, “for the sick, indigent, lepers and insane” (Smith, 2010). Smith (2010) further expressed that the medical services were free and those that were financially stable paid for treatment to be carried out at their homes. Today, 108 years later, much has changed within health care arena. Presently, there is an increase in the number of persons resorting to the public hospitals and public clinics for medical attention. For those that are in good financially standings they make use of private hospitals or/and other private medical facilities. While some people may use the public medical facilities by choice there are others whom, because of their income or lack of income, have no other alternative but to fall at the hands of the public services. Too, for many years the Bahamas has had the problem of immigrants from Haiti crossing the Bahamian borders illegally and this therefore results in an increase in the funds allocated for the health care industry. According to McCartney (2010) the Haitian nationals accounted for 11.5% of the Bahamas population, hence adding to the government health care budget (McCartney, 2013). The reality is that the Bahamas is far from winning...