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Financial statements both report on the position of a firm at a point in time and in its operations during a past period. However, its real utility lies in the fact that they can be used to help predict future earnings of the company and dividends and the risk factor of these cash flows. From the point of view capital investor, predicting the future is what financial statement analysis in question. From the standpoint of management, financial statement analysis is useful both as a way to anticipate future conditions and, more importantly, as a starting point for planning actions that will influence the future course of events for the company.
Financial ratios are designed to show the relationships between the accounts of the financial statements. Ratios of numbers put into perspective. They provide the necessary comparisons to understand the current situation of the company together with its past performance and future potential threats. These comparisons are made by the ratio of analysis. It should be noted that, according to financial analysts, a unique relationship is relatively useless to make assessments relevant to the health of a company. Therefore, if it is to be interpreted effectively a relationship should be systematically compared with other business relationships examined, or even competitors of the industry during a specific period of time.
Financial analysts use ratios that can be broadly characterized as belonging to three main groups. Managers who use indexes to help analyze, control and improve business operations, credit analysts, who analyzes the relationships to help determine a company's ability to pay its debts, and securities analysts, which are related to the efficiency of a company and prospects growth. As expected, each group of analysts has specific areas of interest, who wishes to investigate. Therefore, the relations can be characterized in groups specific tasks. The five categories of group are liquidity ratios, asset management ratios, the ratios of debt management, profitability ratios and ratios of market value.
One of the first concerns of the majority of financial analysts is liquidity. In fact, is the ability of the company to measure their maturity. By relating the amount of cash and other assets to current obligations, the analysis provides a fast connection and easy to measure the use of liquidity. The second group of reasons, working capital ratios, measuring the effectiveness of the company is managing its assets. If you also many assets, interest expense will be too high, and therefore their profits will be depressed. Moreover, if goods are too low, profitable sales may be lost. Thus, having the appropriate level of each type of asset is considered immaterial. The stock rotation relationship is defined as the cost of sales divided by the inventories. These relationships suggest that the company maintains large stocks of inventory, overstock, of course, unproductive and represent an investment with a low or zero rate of return.
Profitability is the net result of a large number of policies and decisions. Although the ratios examined thus far provide some information about how the company is operating, profitability ratios show the combined effects of liquidity, asset management and management of debt on operating income and net income. Return on capital employed is calculated by dividing the net profit before tax to capital and reserves.
About the Author:
Jonathon Hardcastle writes articles on many topics including
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Article Source: ArticlesBase.com – Financial Ratios in Sports
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