To see the Firms Financial position
Firms Performance
Trend analysis
Describe the four approaches to using financial ratios?
Steps in 'Ratio Analysis'Step 1: Collection of information, which are relevant from the financial statements and then to calculate different ratios accordingly.Step 2: Comparison of computed ratios with the past ratios of the same organisation or with the industry ratios.Step 3: Interpretation, drawing of inferences and report-writingClassification of Ratios
1. Liquidity Ratios - Ability of the company to pay off debt 2. Activity Ratios - How quickly a firm can convert its non-cash assets to cash assets 3. Debt Ratios - Ability of the firm to repay long-term debt 4. Profitability Ratios - To Measure the firms use of its assets and control of its expenses to generate an acceptable rate of return 5. Market Ratios - To Measure the investor response to owning a company's stock and also the cost of issuing stock
It can be related to unqualified or unskilled management, to inaccurate record keeping resulting in inaccurate ratios to be calculated from the balance sheet and income statement, or just generally not having enough information at hand to make the decision.
Indicate the usefulness and limitations in using ratios to do a trend analysis Sheryl Smith
The ratios are percents, which can be calculated by a punnett square.
there are many profitability ratios which are calculated. some of them are:profit marginoperating margintotal asset turnoverreturn on assets (ROA)return on equity (ROE)
you add your weighted premiums and divide by your weighted claims. (you do not weight the loss ratios )
when a number of ratios give the same answer after solving the ratios the ratios are said to be equivalent ratios
The accounting ratios are calculated as per last reported financial statements and are re-calculated for present financial reports. The change is noted and then a reason is sought for the change.For example last times gross profit margin may be 20% but this time it might be 15% due to increased cost of labor etc
Ratios are often classified using the following terms: profitability ratios (also known as operating ratios), liquidity ratios, and solvency ratios.
Ratios
Financial ratios of all company's can be calculated based on their financial statements that would be declared during their quarterly result announcement. Balance Sheet, Income Statement, Statement of Cashflows, Statement of Earnings etc are some of the documents from which the information required for calculating these financial ratios can be picked up. Also, if the company is listed in the stock market, its current stock price too is used for calculating some of these ratios.
1 - Activity ratios 2 - Profitability ratios 3 - Liquidity ratios
1 - Activity Ratios 2 - Liquidity ratios 3 - Profitability ratios
'''''Limitations of financial ratio analysis''''' # Many ratios are calculated on the basis of the balance-sheet figures. These figures are as on the balance-sheet date only and may not be indicative of the year-round position. # Comparing the ratios with past trends and with competitors may not give a correct picture as the figures may not be easily comparable due to the difference in accounting policies, accounting period etc. # It gives current and past trends, but not future trends. # Impact of inflation is not properly reflected, as many figures are taken at historical numbers, several years old. # There are differences in approach among financial analysts on how to treat certain items, how to interpret ratios etc. # The ratios are only as good or bad as the underlying information used to calculate them. Although ratio analysis is very important tool to judge the company's performance , following are the limitations of it. 1. Ratios are tools of quantitativeanalysis, which ignore qualitative points of view. 2. Ratios are generally distorted by inflation. 3. Ratios give false result, if they are calculated from incorrect accounting data. 4. Ratios are calculated on the basis of past data. Therefore, they do not provide complete information for future forecasting. 5. Ratios may be misleading, if they are based on false or window-dressed accounting information
equivalent ratios are different ratios that name the same comparison