Financial Ratio Analysis Essay

The following report is a brief comparative analysis of two of Australia’s largest deposit-taking financial institutions (FI), Australia and New Zealand Banking Group Ltd. (ANZ) and Westpac Banking Corporation (Westpac). This report seeks to identify which of the FIs has a greater aggregate return per dollar of equity and thus establish the highest performer, or most profitable, of the two. The Return on Equity Model (ROE) (Koch & MacDonald,

The liquidity ratios indicate a firm's ability to carry out enough revenue in order to cover its obligations and continue its operations.

In order to ascertain how well a company is performing, analyses must be done in regard to the business being stable, including its’ ability to pay debts, how much cash or other liquid assets are available, and whether the organization is viable enough to continue operations. These analyses typically look at income statements, balance sheets, and statements of cash flow, where current and past performance will be studied with the goal of predicting how the company will perform in the future.

The Rate of Return on Total Assets is the ratio that shows the earnings of a company including

Rate of return on common stockholders’ equity: This ratio determines how much profit the company makes from the money invested by the shareholders. Investors will use this ratio to determine if the company is profitable over

Liquidity ratios measures a company`s ability to provide enough cash to cover its short-term obligations. The most common liquidity ratios include; the current ratio and the quick ratio.

Ratio analysis is a very useful tool when it comes to understanding the performance of the company. It highlights the strengths and the weaknesses of the company and pinpoints to the mangers and their subordinates as to which area of the company requires their attention be it prompt or gradual. The return on shareholder’s fund gives an estimate of the amount of profit available to be shared amongst the ordinary shareholders; where as the return on capital employed measures an organization 's profitability and the productivity with which its capital is utilized. Return on total assets is a profitability ratio that measures the net income created by total assets amid a period.

Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas. Financial ratios are important because they help investors make decisions to buy hold or sell securities.

The paper illustrates that financial ratio analysis is an important tool for firm’s to evaluate their financial health in order to identify areas of weakness so as to institute corrective measures.

Current Ratio is the measure of short-term liquidity. It indicates that the ability of an entity to meet its

The return on equity conveys the profits of the company as a rate of return on the amount of owners' equity. ROE uses average owners equity over the specified time period and net income. Historically a ROE of between 10% and 15% were considered average. Recently higher rates in growth industries have been greater.

The calculation of ratios is the calculation technique for analyzing a company’s financial performance that divides or standardize one accounting measure by another economically relevant measure. Financial ratios can be used as a tool to demonstrate financial statement users for making valid comparisons of firm operating performance, over time for the same firm and between comparable companies. External investors are mostly interested in gaining insights about a firm’s profitability, asset management, liquidity, and solvency.

For any company, the ability to meet its short-term and long-term financial goals is an essential factor in maintaining its operations and ensuring future growth. A company evaluation at regular time intervals helps to check its financial health, its capital structure and its potential to attract investors.

This ratio is expressed in percentage. If the ratio is high it shows that the company is utilizing its assets in better way to generate its income. If the ratio is less it shows that the company is in difficult position to meet its debt. Formula to find the return on assets ratio is: - return on assets = net profit / total assets. Whereas net profit means the amount arriving after deducting all the expenses which includes taxes also. In addition to this he also explains about the profit margin ratio (PMR). PMR is the ratio which expresses the relationship between profit and sales. Formula used to find the PMR is: - Profit margin ratio = net profit/net

Ratio analysis is generally used by the company to provide some information on how the company has performed during that year, so that the parties involved including shareholders, lenders, investors, government and other users could make some analysis before making any further decision towards that particular company. As mentioned by Gibson (1982a cited in British Accounting Review, 2002 pg. 290) where he believes that the use of ratio analysis is such an effective tool to evaluate the company’s finance, and to predict its future financial state. Ratios are simply divided in several categories; these are the profitability, liquidity, efficiency and gearing.