Financia Statement Analysis

8/8/2019 Financia Statement Analysis

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1 . I N T R O D U C TIO N :

F i n a n c i a l s t a t e m e n t a r e t h e i n s t r u m e n t p a n e l

o f t h e b us i n e s s e n te r pr is e , p r e p ar ed f o r

d e c i s i o n m a k i n g . T h e y c o n s t i t u t e a r e p o r t o n

m a na g e r i a l p e r f o r m a n c e . A t t e s t i n g t o

m a na g er i a l s u c c e s s o r f a i l u r e & f l a s h in g

w a r n i n g s i g n a l s f a m i l i a r i m p e n d i n g d i f f i c u l t i e s .

T o a r e a d e r w i t h a k n o w l e d g e o f a c c o u n t i n g , a

s e t o f f i n an c i a l s t a te m e n t & t e l l s a g r e a t d e a l

a b o u t a b u s i n e s s e n t e r p r i s e .

N EED LY F IN A N C IA L STA TEMEN T A N A LYSIS :

F i n a n ci a l s t a t e m e nt s a r e n e e d e d t o b e a n a l yz e d &

i n t e r p r e t e d t o s e t c l e a r i n f o r m a t i o n a b o u t b u s i n e s s

o p e r a t i o n & f i n a n c i a l p o s i t i o n .

F i n an ci a l s t a t e m e n t a na l y s i s i s a p r o ce s s o f

i d e n t i f y i n g t h e f i n a n c i a l s t r e n g t h s a n d w e a k n e s s e s

o f t h e f i rm b y p r o pe r ly e s ta b l i s hi n g r e la t io n sh i p

b l o w t h e i t e m s o f t h e B / S a n d P & C A / C .

T O O L S O F F I N A N C I AL S T A T E M E N T S A N A L Y S I S :


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D i f f e r e n t t y p e s o f t e c h n i q u e s a r e u s e d i n f i n a n c i a l

s t at e me n t a n al y si s . T h e se i n cl u de s c o mp a ra t iv e

s t at em en ts , s ch ed ul e o f c h an gin g i n w a rk in g

c a p i t a l , c o m m o n s i z e p e r c e n t a g e s , f u n d a n a l y s i s ,

t r e n d a n a l y s i s a n d r a t i o a n a l y s i s .

R a t i o a n a l y s i s i s t h e p o w e r f u l t o o l i n t h e f i n a n c i a l

s t a t m e n t a n a l y s i s .

R A TIO:

I t i s s i m p le ma t h e m a t i c a l e x p r es s io n o f t h e

r e l a t i o n s h i p o f o n e i t e m t o a n o t h e r . I t s h o w s t h e

r e l a t i o n s h i p b / w s t a t i s t i c a l d a t a .

RATIO ANALYSIS

IN TR OD U C TION :

R a t i o a n a l y s i s i s a w i d e l y u s e d t o o l o f f i n a n c i a l

a n a l y s i s . I t i s d e f i n e d a s t h e s y s t e m a t i c u s e o f

r a t i o t o i n t e r p r e t t h e f i n a n c i a l s t a t e m e n t s s o t h a t

t h e s t r e n g t h s & w e a k n e s s e s o f a f i r m , a s w e l l a s


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i ts h is to r i ca l p er fo rm an ce & w ar ra nt f in an ci a l

c o n d i t i o n , c a n b e d e t e r m i n e d .

R a t i o s m a k e t h e r e l a t e d i n f o r m a t i o n c o m p a r a b l e . A

s in gl e f ig ur e b y i ts el f h as n o m ea ni ng , b ut w e

e x p r e s s e d i n t e r m s o f a r e l a t e d f i g u r e . I t y i e l d s

s i gn i f i ca nt i n fe re nc e s. T he r at i o a re re la t i v e

f i g u re s r e f l e ct i n g t h e r e l a t i o n sh i p b e t w ee n r e l a te d

va r i ab l e s . T h e i r u s e , a s t o o l s o f f i n a n c i a l

a na ly si s, i n V ol vo s t he ir c om pa r i so n a s s in g l e

r a t i o s l i k e a b s o l u t e f i g u r e s a r e n o t o f m u c h u s e .

T h r e e t y pe s o f c o m p a r i s o n s a r e g e n e r a l l y

i n v o l v e d ; v i z .

i . T re n d An a l y s i s

i i . I n t e r f i rm co m p a r i s o n an d

i i i . C o m pa r i s o n w i t h s t a n d a r d s / i n d u s t r y

a v e r a g e .

T r e n d r a t i o s i n v o l v e c o m p a r i s o n o f r a t i o s o f a f i r m

o v e r a p e r i o d o f t i m e , i . e . , p r e s e n t s a m e f i r m . T h e

c o m p ar i s o n o f t h e p r o f i t a b i l i t y o f a f i r m, s a y , y e a r


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1 to y e ar 5 , i s a n i l l u st r at i on o f a t r en d r at i o.

T r e n d r a t i o s i n d i c a t e t h e d i r e c t i o n o f c h a n g e i n t h e

p e r f o rm a n c e imp r o v em e n t , de t e r i o r a t i o n o r

c o n s t a n c y o v e r t h e y e a r s .

I nt e r f ir m c om pa ri so n i nvo lve s c om pa r i ng th e

r a t i o s o f a f i r m w i t h t h o s e o f o t h e r s i n t h e s a m e

l i v e o f b u s i n e s s , o r f o r t h e i n d u s t r y a s a w h o l e .

T h i s , i t r e f l e c t s t h e f i r m s p e r f o r m a n c e i n r e l a t i o n

t o i t s c o m p e t i t o r s .

O t h e r t y pe s o f c om p a r is on ma y r e l a t e t o t h e

c o m pa r i s o n o f i t e m s w i t h i n a s i n g l e y e a r s

f i n a n ci a l s t a t e m e nt o f a f i r m , a n d c o m p a r i s o n w i t h

s t a n d a r d s o r p l a n s .

3 . I M P O R T A N C E O F A / C I N G R A T I O S :

T he i mp or ta nc e o f a cc o un t i ng r at io s, t ha t i s,

r e l a t i o n s h ip s w o r k e d o u t a mo n g v a r i o u s

a c c o u n t i n g d a t a w h i c h a r e m u t u a l l y i n t e r d e p e n d e n t

& w hi c h i nf l ue nc e e ac h o th er i n a s ig ni f ic an t

m an ne r a r is es f ro m t he f ac t t ha t o f t en a b so lu te


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f i gu r es s t an d in g a l on e c o nv e y n o m e an i ng . T h ey

b e co me s ig n i f i ca n t o n l y w he n c on s i de re d a lo n g

w it h o th er f ig ur es . A f i r m e ar ns a p ro f i t o f R s.

1 , 00 , 00 0 . T h is i n fo r ma t io n i s m e ai n gr e ss u n le s s

t h e i r t h e f i g u r e o f c a p i t a l e m p l o y e d t o e a r n i t o r o f

s a l e s a f f e c t e d i s a v a i l a b l e . E v e n i f a n a o b s o l e t e

f i g u re i s c o ns i d e r ed s i g n i f i c an t, o n e ma y b e

s u b c o n s c i ou s l y a w a r e o f t h e o th e r r e l e v a n t

f i g u r e s . W h e n w e s a y t h a t s o a n d s o i s f a t , w h a t

w e a r e t r y i n g t o s a y i s t h a t c o n s i d e r i n g t h e a g e

a n d h e i g h t o f t h e p e r s o n , h e i s o v e r w e i g h t. R a t i o

m ay be e xp re ss e d a s a r at io na l f i gu re o r as a

p e r c e n t a g e . F o r e x a m p l e t h e r a t i o o f 3 , 0 0 , 0 0 0 t o

2 , 0 0 , 0 0 0 m a y b e e x p r e s s e d a s 1 . 5 o r 1 5 0 % .

F o r p u rp o se s o f a n al y si s , a c co u nt i ng r a t i o s a r e

i n d i sp e n s ab l e . S u p p os e , s a l e s h a v e i n c r ea s e d b u t

p r o f i t h a s f a l l e n . O n e m a y b e v a g u e l y a w a r e o f t h e

c a us e s , b ut f o r p r e ci s e k n o w l e d g e i t w i l l b e

n e ce s sa r y t o a n al y si s a l l t h e f i gu r es c om p e te l y.

F o r e x am p l e , w i l l h a ve to a s c e r t a i n t h e


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c o n t r i b u t i o n t o h i g h e r s a l e s b y c h a n g e i n p r i c e s

a n d b y i n c r e as e d o r l o w e r s a l e s vo l u m e , t h e

c on su mp t i on o f m a te r i a l s w i t h a ls o b e a n al ys ed

b o th f o r c h a n g e s i n p r i c e s an d i n qu a nt i t i e s

c o n s u m e d . S u c h a n a l y s i s i s g r e a t l y f a c i l i t a t e d b y

a c c o u n t i n g r a t i o s . I n f a c t , a m e a n i n g f u l a n a l y s i s

o f t h e f i n a n c i a l s i t u a t i o n a n d p e r f o r m a n c e i s t h e

f i r s t g re a t a d va n ta g e o f a / i n g ra t i o s . T h i s

r e qu i r e s r a t io s a nd t he i r c om pa r i so n w hi ch m ay

b e :

i . F or th e sa m e f i r m ove r a pe ri o d fo r ye a r s

o f

i i . F or on e f i r m a g a i n s t an o th er or

i i i . F o r o n e f i r m ag a in s t t he i n d u s t r y a s a

w h o l e o r a g a i n s t p r e d e t e r m i n e d s t a n d a r d s

o r ,

i v. F or o ne d iv i si on o r de pa rt me nt o f a f i r m

a g a i n s t o t h e r d i v i s i o n f o r d e p a r t m e n t s o f

t h e s a m e f i r m .


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I n t er f i r m c om pa r is on a nd i n t ra f i r m c om pa r is on

a r e , t h i s , b o t h p o s s i b l e o n t h e b a s i s o f a c c o u n t i n g

r a t i o s , t h i s c a n a l s o b e a t t e m p t e d i n o t h e r w a y s

b u t a cc ou nt in g r at io s a re i n d is pe ns al be i n t h i s

r e sp e ct . F o r e x a m pl e t o j u dg e w h ic h f i rm h a s t h e

b e st o ve ra l l e f f ic ie nc y, o ne s ho u ld c om pa r e t he

r ate o f p ro f i t o n c ap it a l e mp lo ye d f or t he f i r ms

c on ce rn ed t he s iz e o f t he p ro f i t a s s uc h i s n ot

r e l e v a n t .

A cc ou n ti ng r a t i os n o t o n ly i nd ic at e t he p re se nt

p o s i t i o n , t h e y a l s o i n d i ca t e t h e c a u s es l e a d in g u p

t o t h e p o s i t i o n t o a l a r g e e x t e n t . B e s t r e s u l t s a r e

o b t a i ne d w h e n r t i o s f o r a n u m b e r o f y e a r s a r e p u t

i n a t a bu l ar f or m s o t h a t t h e f i gu r es f o r o n e y e ar

c a n b e e a s i l y c o m p a r e d w i t h t h o s e o f o t h e r y e a r s .

A / ci ng r at io s t a bu la ted f or a n um be r o f y e ar s

i nd ic at e t he t re nd o f t he c ha ng e. T hi s h e l ps i n

a s c e r t a i n i n g o t h e r f i g u r e s i f o n f i g u r e i s a v a i l a b l e .

5 . A DVA N T AG ES OF RAT IO AN AL YSI S:


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1 . S imp l i f i es f i nanc ia l s ta tement : I t

s imp l i f i es the comprehens ion o f

f i na n ci a l s t at e me n ts . r a ti o s t el l t h e

who le s to ry o f changes in the

f inanc ia l cond i t ion o f the bus iness .

2 . F a c i l i t a t e s i n t e r f i r m c o m p a r i s o n : I t

p ro v i de s d at a f or i n t er f i r m c om pa r i so n

r at io s h ig hl ig ht th e f ac to rs a ss oc ia te d

w it h s uc ce ss fu l a nd u ns uc ce ss fu l f i r m.

T he y a ls o r ev ed s tr on g f i r ms a nd w ea k

f i r m s , o v e r v a l v e d a n d u n d e r v a l v e d f i r m s .

3 . H e lp s i n p l a n n i n g : I t h e l p s i n p l a nn i n g

a n d f o re c a s t i n g . R a t i o s c a n a s s i s t

m a n a g e m e n t i n i t s b a s i c f u n c t i o n s o f f o r e

c a st i ng , p l an n in g , c o -o r di n at i on , c o nt r ol

a n d c o m m u n i c a t i o n .

4 . M a k e s i n t e r f i r m c o mp a r i s o n p o s s i b l e :

R a t i o a n a l y s i s a l s o ma k e s p o s s ib l e

c o m p a r i s o n o f t h e p e r f o rm a n c e o f


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d i f fe r e n d d i v i s i on s o f t h e f i r m . T h e r a t i os

a r e h e l p fu l i n d e c id i ng a b o u t th e i r

e f f ic ie n cy o r o th er wi se i n t he p as t a nd

l i k e l y p e r f o r m a n c e i n t h e f u t u r e .

5 . H elp s in i nv es tm en t de ci s io ns : I t h el ps i n

i n v e s t me n t d e c i s i o n s i n t h e c a s e o f

i n v e s t o r s a n d l e a d i n g d e c i s i o n s t h e c a s e

o f b a n k e r s e t c .

F i n a n c i a l M a n a g e m e n t b y k h a n a n d J a i n .

A d v a n c e d A / C s 1 9 9 2 M . C S h u l a a n d T . S .

g r e w a l

A d v a n c e d A / C s b y M . A . G h a n i .

6 . U SE S & AP PL IC AT IO N O F R AT IO AN AL YS IS :

p r o b a b l y t h e m o s t w i d e l y u s e d f i n a n c i a l a n a l y s i s

t e c h i n q u e i s r at i o a n a l y s i s . Th e a n a l y s i s o f

r e l a t i o n s h i p b e t w e e n t w o o r m o r e l i n e i t e m s o f t h e

f i n a n c i a l s t a t e m e n t .

F o r e e x a m p l e , a c o m mo n l y u s e d f i n a nc i a l r a t i o , i s

t h e c u r r e n t r a t i o w h i c h i s t h e r e l a t i o n s h i p b e t w e e n


10/21

c u rr e n t a s se t s a n d c u rr e nt l i ab i l i t ie s . G e ne r a l l y

f in a nc ia l r a t io a re c a l cu la te d f or t he p ur po se o f

e v a l u a t i n g f o u r a s p e c t o f c o m p a n y s o p e r a t i o n s :


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A C C OU N TIN G R A TIOS:

I t e m , e . g . , s t o c k t u r n o v e r r a t i o , o r t h e r a t i o o f t o t a l

a ss et s t o s a l es . T he m os t c om mo nl y u se d i nt er

s t a t e m e n t r a t i o s a r e g i v e n i n t h e c h a r t e x h i b i t i n g

t r a d i t i o n a l c l a s s i f i c a t i o n o r s t a t e m e n t r a t i o s .

( B) C la ss i f ic at io n a cc or d in g t o F un c t io n o r T e s ts .

R ob er t N . a n to ny s ug ge s t ed t ha t r at io s m ay b e

g r o u p e d o n t h e b a s i s o f c e r t a i n t e s t s w h i c h s a t i s f y

n e e ds o f t h e p a rt i es h a vi n g f i na n c i a l i n te r e st i n

t h e b u s i n e s s c o n c e r . T h e s e t e s t s a r e ( I ) T e s t o f

L iq u i d i ty , ( i i ) T es t o f P ro f i ta b i l i ty , ( i i i ) T es t o f

S o l v e n c y e t c . U n d e r t h i s c l a s s i f i c a t i o n r a t i o s a r e

g r o u p e d a s f o l l o w s :


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C L A S S I F I C AT I O N A C C O R D I N G T O T E S T S

Liquidity Ratio

A) 1. CurrentRatio

2. Liquid(AcidTest orQuick)

3. AbsoluteLiquid

Ratio.B) 1. Debtors

Turn over Ratio.

2. CreditorsTurn overRatio.

3. Inventory

Turn overRatio.

Long Solvency andLeverage Ratios

FinancialOperatingComposite

1. Debt equityRatio

2. Debt to totalcapital ratio.

3. Interest

coverageratio

4. Cash flowdebt serviceratio

5. Capitalgearing

Activity ratios

1. Inventory

TurnoverRatio

2. Debtorsturnoverratio.

3. FixedAssets turnover Ratio.

4. Total Assetsturnoverratio.

5. WorkingcapitalturnoverRatio.

6. Payableturnover

ratio

7. Capitalemployedturnoverratio.

a) in relation sales

1. GrossProfitRatio.

2. OperatingRatio.

3. OperatingProfit rati

4. Net Pro

Ratio5. Expense

Ratio.

b) in relation Investment

6 Return investme.

7 Return capitalemployed

8 Return equitycapital.

9 Return totalresource

10 Earningsper share

11 Priceearningratio


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( a) L iq u i di ty R at io s. T he se a re t he r at io s w h ic h

m ea su re t h e s ho r t t er m s o lve nc y o r f in an ci al

p o s i t i o n o f a f i r m . T h e s e r a t i o s a r e c a l c u l a t e d t o

c o m m en t u p o n t h e s h o r t t e r m p a y i n g c a p a c i t y o f a

c on ce rn o r t he f i r m s a b i l i ty t o m ee t i ts c ur re nt

o b li g a t i o n s . T h e va r io us l i q u i d i t y r at i o s a n d

a b so l ut e l i qu i d i t y r a t i o s a r e: c u rr e n t r a t i o , l i qu i d

r a t i o a n d a b s o l u t e l i q u i d r a t i o .

( b ) L o n g t e rm So l ve n c y a n d L e ve r a g e p a t i o s .

L o n g t e r m s o l ve n c y r a t i o n s c o n v e y a f i r m s a b i l i t y

t o me e t t h e i n t e r e s t c o s t s a n d r e p a y m e n t

s c he d u le s o f i t s l o ng t e rm o b l i g at i on s , e . g. , d e bt

Eq u i t y R a t i o a n d i n t e r e s t c o ve r a g e R a t i o .

L e v e r a g e R a t i o n s h o w

1 . L i q u i d i t y (m . a . G e n i )

2 . Ac t i v i t y or tu r n o ve r o f as s e ts .

3 . L e ve r a g e

4 . P ro f i ta b i l i ty ( fu r t he r d ef ai l M .A G an i)


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1 . L iq u id i t y R a t i o

I t he l p s t o u s e r t o as s e s s t h e co mp a n y s

a b i l i ty t o m ee t c ur re nt ly m at ur in g o r s ha rt

t e r m o b l i g a t i o n s .

2 . A c t i v i t y or Tu r n o ve r Ra ti o

i t i s use fu l f o r ava lua t ing the

e ff ec ti ve ne ss w it h w hi ch t he c omp an y

uses i t s asse ts .

3 . L e ve r a g e R a t i o s

I t p rov ide in fo rmat i on about the

c om pa ny s a bi l i ty t o m ee t b ot h c ur re nt

and long te rm ob l iga t ions .

4 . P r o f i t a b i l i t y R a t i o s

I t h e l p fu l f o r e va l u a t i n g ma n a ge m e n t s

s u cc e ss i n s e ne r a t i n g r e tu r n s f o r t h os e w h o

p r o v i d e s c a p i t a l t o t h e c o m p a n y .

Ea c h o f t h e s e t y p e s o f f i n a n c i a l r a t i o s i n

d i s c u s s e d t h u s a p p l i c a b l e i n b u s i n e s s l i f e .


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U SES A N D OF A C C OU N T R A TIOS:

T he i mp ar ta nc e o f a /c r at io s, t ha t i s ,

r e l a t io n sh ip w or ke d o ut a mo ng v ar io us

a / c d a ta . L w h i c h a r e mu tu a l l y

i n t e r d e p e n d e n t a n d w h i c h i n f l u e n c e e a c h

o t h e r i n a s i g n i f i c a n t m a n n e r a r i s e s f r o m

t h e f a c t a h t a f t e n a b s o l u t e f i g u r e s t a n d i n g

a l on e c o nv e y n o m e an i ng . T h ey b e co m e

s i g n i f i c an t o n l y w h e n c o n si d e r a l o n g w i t h

t h e o t h e r f i g u r e s . R a t i o m a y e x p r e s s a s a

r a t i o n a l f i g u r e o r a s a p e r c e n t a g e f i g u r e

e . g . t h e r a t i o s o f 3 0 0 0 0 0 t o 2 0 0 0 0 0 m a y

b e e x p r e s s e d a s 1 . 5 o r 1 5 0 % .

F o r t h e p u r p o s e o f a n a l y s i s t h e a / c r a t i o s

a re i nd is pe n si ab le . S up pa se s a l es h a s

i ne re as ed a lo ng p ro f i t h as f a l le n. O ne

m a y v a s u e l y a w a re o f t h e c a u s e s. B u t f o r

p r e c is e k n o w le d g e i t i s b e t t e r t o a n a l y s i s

a l l t he f ig ur e c om pl et el y . S o r a t i os a re

h e l p f u l t o m a k e c o m p a r i s o n .


16/21

I nf ac t th e m ea nin gfu l a na ly s i s o f t he

f i n a n c i a l s i t u a t i o n a n d t h e p e r f o r m a n c e i n

t h e f i rs t g re at a dva nta ge o f f i na nc i al

r a t i o s . O u r c o m p a r i s o n m a y b e .

i . F o r t h e s a m e f i rm o ve r a pe r i o d o f

y e a r

i i . F o r on e f i r m a g a i n s t a no t h e r

i i i . F or o ne f i r m ag ai ns t t he i nd us t r y as

a wh ole o r a ga in st p re de te r mi ne d

s t a n d a r d s .

i v . F o r o n e d i v i s i o n o r d e p a r t m e n t o f

f i r m w i t h o t h e r d i v i s i o n o r d e p a r t m e n t

o f f i r m .

I n t e r f i r m c o m p a r i s o n o r i n t r a f i r m

c o m p a r i s o n t h u s b o t h p o s s i b l e w i t h r a t i o

a na ly s i s e .g . t o j ud ge t he e f f ic ie n cy o f

t w o f i r m o n e s h o u l d c o m p a r e t h e r a t e o f

p r o f i t o n t h e c a p i t a l e m p l o y e d f o r t h e f i r m

c o n c e r n e d .


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A /c r a t io s n ot o n l y i nd ic at e t he p re se n t

p os i t io n . Th e y a ls o i nd ic at e t he c au se s

l e a d i n g t o t h e p o s i t i o n t o a l a r g e e x t e n t

e . g . a / c r a t i o s m a y i n d i c a t e n o t o n l y t h a t

f i na n c i a l p o s i t io n i s p r ec a r i o ns b u t a l so

t h e p a s t p o l i c i e s w h i c h h a v e c a u s e d i t .

B e s t r e s u l ts a r e o b t a i n e d w h e n r a t i o s f o r

a n u m b e r o f y e a r s a r e p u t i n a t a b u l a r

f o r m s o t h a t t h e f i g u r e s o f o n e y e a r c a n

b e e as i l y c o mp ar ed w i t h th as e o f t h e

o t h e r y e a r .

A / c r a t i o s t a b u l a t e d f o r a n u m b e r o f y e a r s

i n d i ca t e t h e t r e n d o f c h a n ge s . T h i s h e l p s

p r e p a r a t i o n o f e s t i m a t e s f o r t h e f u t u r e s .

R a t i o a l s o h e l p a s c e r t a i n i n g o t h e r f i g u r e s

i f o ne f i g ur e i n r el ia ble s up pa se i t i s

k n o w n t h a t r a t i o o f w a g e s t o s a l e s i s 1 5 %

i t i s t h a n e a s y t o c a l c u l a te t h e a m o u n t t o

b e s p e n t o n w a g e s i f t h e a m o u n t o f


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e x p e c t e d s a l e s i s k n o w n .

R at i o c a n b e us ed t o p ro du ce f a ce as t

s t a te me nt e .g . o ne w ou ld m ak e d ir ec t

s t a t e m n t o f a l l t h e i t e m s o n t h e b a l a n c e

s h ee t b y p r og e ct i ng f i na n ci a l r a t i o s i n to

t h e f u tu r e an d th a n ma k in g e st i ma t e o n

t h e b a s i s o f t h e s e r a t i o s .

F in an ci a l r a t i os ma y be c om pu te d fo r

a n al y si s o f t h e s t at e me n t . J t he s e r a t i o s

a n d t h e r a w f i g u r e s c a n b e c o m p a r e d w i t h

t ho se o f t he p re se n t a nd p a st f in a nc ia l

s t a te me nt s u si ng t hi s i n fa r ma t i o n t h e

f i n a n c ia l ma na g e r c an a na l y z e t he

d i r ec t i o n o f c h a n g e s i n t h e f i n a n c ia l

c on di t i on a nd p er fo rm an ce o f t he f i r m

o v e r t h e p a s t , t h e p r e s e n t , a n d t h e f u t u r e .

A D VA N TA GES OF R A TIO A N A LYSIS :

R a t i o A n a l y s i s i s an im p o r t a n t an d a g e o r d


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t e c h n i q u e o f f i n a n c i a l a n a l y s i s .

T h e f o l l o w i n g a r e t h e s h o w o f t h e a d v a n t a g e s o f

r a t i o a n a l y s i s .

1 . S I MPL IF IE S F I NAN C I AL ST AT EM EN T S:

I t s im p l i f ie s t h e c o mp r r oh e ns i on o f f in a nc i a l

s t a t e m e n t s . r a t i o t e l l s w h o l e s t o r y o f c h a r g e s

i n f i n a n c i a l c o m d i t i o n s o f t h e b u s i n e s s .

2 . F AC IL IT AT ES I NT ER F IR M C OM PA RI SO N

i t p r o v i d e s t h e d a t a f o r i n t e r f i r m c o m p a r i so n .

R a t i o s h i g h h i g h t s t h e f a c t o r s a s s o c i a t e d w i t h

s u c c e s s f u l f i r m , t h e y a l s o r e v e a l s t r o n g f i r m s

a n d w e a k g f i r m s o v e r v a l v e d a n d u n d e r v a l v e d

f i r m s .

3 . H EL PS IN PL AN N IN G :

i t h e l p s i n p l a n n i n g a n d f o r e c a s f i n g , r a t i o c a n

s a ss i st m a na g em n t. I n i t s b a si c f i nc t i o ns o f

f o re c as t in g , p l an n in g , c o -o r di n at i on , c o nt r or

a n d c o m m u n i c a t i o n s .

4 . M A KES IN T ER F IRM C OM P AR IS O N


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P O S S I B L E :

r a t i o a n a l y s i s a l s o m a k e s p o s s i b l e c o m p a r i s o n

o f t he p er fo r ma n ce o f d i f fe r en t d iv is io ns o f

t he f i r m. L th e r a t io s a r e h e lp fu l i n d ec id in g

a b o ut t h ei r e f f i c ie r ly , o t he r w i se i n t h e p a st

a n d l i k e l y p e r f o r m a n c e i n T h e F U T U R E .

5 . H EL PS IN IN V EST MEN T D EC I SIO NS:

i t h e l p s i n i n v e s t m e n t c l e c i s i o n s i n t h e c a s e o f

i n v e s t o r s a n d r e n d i n g d e c i s i o n i n t h e c a s e o f

b a n k e r s e t c .


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B IB L IOGR A PH Y:

N a m e o f B o o k s

1 )

2 )

3 ) F u n d a m e n t a l s o f F i n a n c ia l m a na g e me n t

J a m e s c .

V a n

H o r n e .

4 ) Ad va n c e a c c o u n t i n g M . A .

G a n i

1 . I N T R O D U C T IO N

2 . N E ED S FO R F I N AN C I AL ST A T EM EN T

A N A L Y S I S

3 . T Y PES O F F IN A N C IA L ST AT EM EN T

A N A L Y S I S

4 . R A T IO D EF IN T IO N

5 . I MPO RT AN CE OF AC C O UN T IN G R AT IO S

6 . AD VAN L A G ES OF RAT I O AN AL YS IS

7 . AP PL I C AT I O N AN D U SE S O F R AT IO

A N A L Y S I S

8 . C O N C L U SI O N

Financia Statement Analysis

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