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Business Studies Financial Ratios
Usefulness of financial ratios
Financial ratio analysis is conducted by
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Horizontal analysis is the comparison of historical financial information over a series of reporting periods, or of the ratios derived from this financial information. The intent is to see if any numbers are unusually high or low in comparison to the information for bracketing periods, which may then trigger a detailed investigation of the reason for the difference. The analysis is most commonly a simple grouping of information that is sorted by period, but the numbers in each succeeding period can also be expressed as a percentage of the amount in the baseline year, with the baseline amount being listed as 100%.
Vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item. Typically, this means that every line item on an income statement is stated as a percentage of gross sales, while every line item on a balance sheet is stated as a percentage of total assets.
Financial ratio analysis are actually involves the calculation of several ratio that will enable the manager to evaluate the performance and financial status of the company by comparing its financial ratios with the financial ratio of other companies.
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Investors often take a close look at liquidity ratios when performing fundamental analysis on a firm. Since a company that is consistently having trouble meeting its short-term debt is at a higher risk of bankruptcy, liquidity ratios are a good measure of whether a company will be able to comfortably continue as a going concern. Any type of ratio analysis should be looked at within the correct context. For instance, investors should always look at a company’s ratios against those of its competitors, its sector and its industry and over a period of several
The analytical procedures is yet another way to detect the fraud. Through analytical procedures the relationship between different figures is develop that support the increase or decrease effect on the balance sheet and the income statement. The following procedures to be performed:
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.
A tool used to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry to judge the performance of the company.
The data enables easier visualization of the proportions of separate accounts. Vertical analysis results in common-size financial statements that enable easy comparisons of financial data among companies and the industry sector. Overall, Costco’s vertical analysis is rather uneventful. No percentage moved further than 0.1% when comparing the years of 2013 & 2014. While uneventful, there are still a few areas I would like to analyze.
Interpretation of Financial Statements There are three main aids to the analysis of financial statements: HORIZONTAL and TREND ANALYSIS VERTICAL ANALYSIS RATIO ANALYSIS HORIZONTAL and TREND ANALYSIS = == == == ==
Overall, Horizontal analysis and financial ratios are essential factors that businesses use to monitor its liquidity. Therefore, in order to improve Apple’s ratios and profitability, the company needs to implement a strategy to increase the company’s liquidity. Business owners or managers should monitor current ratio and acid test ratio as these ratios help us to ensure the company has the proper liquid assets to pay current liabilities, to stay in operations and to expand the company. As we noted in our acid test ratio and current ratio for the company, we show a lower ratio for acid test ratio than the current ratio, which means that the company’s current assets rely on inventory. Therefore, the company needs to convert old inventory into
Liquidty Ratios are used to judge short term solvency of the company as if it have sufficient working capital to pay off its short term obligation. Generally two measures of Liquidity Ratios are used by analyst to adjudge the liquidity position of the company:
In our literature it states that a “vertical analysis evaluates financial statement data by expressing each item in a financial statement as a percent of a base amount.” I chose to look vertically at current assets and liabilities, of both companies so I can compare these figures between Coca-Cola and PepsiCo to find out who is in better current standing.
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.
By taking into account only the most liquid assets, ratio 1.0 in 2013 and 2012, which increased by a small margin 0.2 from 2011, indicates that company has strong liquidity position.
The vertical analysis can also be used to show the percentage different revenue line items that make up total sales. This analysis will show if there is an increase or decrease for each item in a percent form. For some people, when you see a percent form, it’s easier to read the results on how the company is doing financially.
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.
Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.
Financial analysis is a process of studying the financial condition and main results of a company's financial activity in order to identify reserves to increase its market value and ensure further effective development. Also Financial analysis is used to understand the financial aspects of an investment and solutions.
Another type of an analysis that can be utilized is the bank record analysis. This is simply following the money trail and tracking how much money is being spent.