Financial Analysis : Financial Information

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Financial ratios make it easier for quantitative analysis, where financial information is analysed by investors, as the numerous numbers contained in a company financial statement can leave them confounded. There are five to six main types of financial ratios including liquidity measurement ratios, profitability indicator ratios, debt ratios, operating performance ratios and cash flow indicator ratios (Richard Loth, n.b and Jim Riley,n.b)1 and 2.
However, these can be grouped into two principal category uses (Whittington, 1980 as stated in Barnes, 1987, pg 449). The first one is traditional, where standards are compared with the firm’s ratio. This dates back to the late 19th century during the civil war when current assets to liabilities were developed (Horrigan 1668; de 1974 as stated in Barnes 1987 pg 449). Conversely, the second is used to estimate performance - used mainly by two types of people, by accountants and analysts to estimate future profit by multiplying predicted sales by the profit margin, which is the profitability indicator ratio mentioned before. The other type of people who also engage in estimating future performances are researchers in statistical models by taking account of corporate failures, credit ratings, assessments of risks, testing economical hypothesis and inputs in final ratios 3.
Although, what both types have in common is the ability to assess if debts can be paid or not, evaluate business and managerial success and statutorily relate firms
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