Financial Ratios and Profit Analysis Methods

Financial ratio analysis is a valuable tool that allows one to assess the success, potential failure or future prospects of the company (Bazley 2012). The ratios are helpful in spotting useful trends that can indicate the warning signs of

These ratios will help us see how effective a company is at using their sales or assets and turning this into income.

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.

Financial ratios are great indicators to find a firm’s performance and financial situation. Most of the ratios are able to be calculated through the use of financial statements provided by the firm itself. They show the relationship between two or more financial variables that can be used to analyze trends and to compare the firm’s financials with other companies to further come up with market values or discount rates, etc.

The ratios that would be most important to a business include: the current ratio, debt ratio and the return on assets. The current ratio is comparing the company's ability to pay its short term obligations. In general, the higher the number, the lower the risks that a firm will face from these challenges. This is important to a business, by helping executives to ensure that they have enough liquidity to pay creditors, employees and address other challenges. ("Financial Ratios," 2011)

Beds in services in this hospital are same for last three years but the standard benchmark which is 121 is

How can financial ratios extend your understanding of financial statements? What questions do the time series of ratios in case Exhibit 7 raise? What questions do the ratios on peer firms in case Exhibits 8 and 9 raise?

Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.

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.

Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their

In contrast ratios have drawbacks as well. Initially the possibility of calculating different data between companies and as a consequence the result can lead to false conclusion. Furthermore comparing businesses with different turnovers could lead to a less meaningful result. Moreover ratios are consisted of an initial point for a further analysis. Also as we saw above ratios show us the financial strengths and weaknesses, but they cannot explain by themselves the reason of existence of the specific strengths and weaknesses or the changes that might have been happened. Another disadvantage is the existence of plenty of ratios but a small number of them is considered useful. Finally the absence of accepted list of ratios which can be implemented to financial statements and the lack of a standard calculation method for some of the

In this we are going to analyze important key ratios such as profitability, liquidity, debt management, asset management.

1. Financial ratios are used to help analyze the company's financial statements. For a small company that is not publicly traded, the most important use of ratios is to compare current performance against past performance. Ratios cover a number of performance metrics that can help a business to benchmark performance against publicly traded companies as well, provided that the business has put together its internal statements according to GAAP, making them compatible with the statements of publicly-traded companies. Ratios cover liquidity, solvency, managerial efficiency, leverage and profitability (NetMBA, 2010). A larger corporation often pays attention to the key ratios, not only because they are an indicator of performance, but because they realize that external parties use these ratios as well.

The company’s performance on these dimensions shall be measured through financial ratios analysis. As there are many variations of ratios available to measure more or less the same aspect of performance, I have short-listed, in the following table, the key ratios that will be utilized in the analysis:

According to our reading text, ratios are used to make comparisons between different aspects of a company's performance or how the