Journal on Financial Ratio Analysis

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,

S., & Hassan, M. K. (2012). The domination of financial accounting on managerial Commerce & Management, 22(4), 306-327. doi:10.1108/10569211211284502

This data set is divided into three categories, this paper compares only three ratios for each category; Solvency Ratios: Quick Ratio, Current Ratio, and Current Liabilities to Inventory Ratio; Efficiency Ratios: Collection Period Ratio, Assets to Sales Ratio, and Accounts Payable to Sales Ratio; Profitability Ratios: Return on Sales Ratio, Return on Assets, and Return on Net Worth.

Accounting standards are important. For example, if accounting is considered as the language of business, accounting standards are its grammar. Properly developed and implemented, they can encourage business expansion and help regulate the economic system. High-quality accounting standards can facilitate the flow of information from businesses to a range of different users. These include investors, banks, creditors, the revenue commissioners, regulators, employees and the general public. The availability of accounts prepared in accordance with recognized accounting standards encourages trade by promoting confidence in businesses.

Financial accounting statements can help a user to make future decisions by showing the concerned business’s health. It shows where money is being generated, spent and lost, depicting the financial performance and financial position. The statements can also help in situations such as raising fresh capital in the form of a loan, e.g. a bank will most likely require these statements to show the business’s credibility or worthiness. The statements help influence managerial decisions on which direction the business needs to head, and how to best maximize profit.

From the above analysis, it is obvious that financial ratios of companies in same industries can never be the same but can

The globalization of markets over the past 50 years has led to the demand for increasingly comparable financial statements across countries. In response to this demand, the International Accounting Standards Board (IASB) was formed with the purpose of developing a set of high quality global accounting standards. Although a majority of developed markets have adopted the international standards, the United States has not. One reason for the delay in adoption is that many of the standards are very similar. However, there are also several key differences between the two. Presently, the United States Financial Accounting Standards Board (FASB) and the IASB have

Each of these financial ratios serve an analytical purpose to the financials of a company. The current ratio measures a company’s ability to pay off their obligations. This includes long term and short term. The acid test ratio is an indicator of whether a company has enough short term assets to cover its immediate liabilities. Times interest earned is a ratio that measures a company’s ability to meet all of its debt obligations. Profit margin is expressed as a percentage and measures how much of each dollar of a sales a company will keep in their earnings. Total asset turnover is a ratio that measures the efficiency of the use of resources within a company. It measures the ability to generate sales through the use of the company’s assets. Inventory turnover is a ratio to measure how quickly a company’s inventory is sold. It also measures how effectively investing into inventory is used within the company. Inventory turnover helps figure out if obsolete inventory is present or if pricing problems exist.

Financial ratios are "just a convenient way to summarize large quantities of financial data and to compare firms' performance" (Brealey & Myer & Marcus, 2003, p. 450). Financial ratios are very useful tools in order to determine the health of a company, help managers to make decision, and help to compare companies that belong to the same industry in order to know about their performance.

Financial ratios have proven to be a useful tool for effective financial management and planning. Primarily known for improving the understanding of financial results and trends over time, financial ratios are a unique way to provide a quantitative analysis to communicate overall organizational performance. This tool is useful for managers to focus in on the company’s strengths and weaknesses from which strategies and operations can be formed. Investors are also commonly known to use ratios to measure results against other companies to make appropriate judgments regarding management effectiveness and mission impact. For ratios to be deemed meaningful and useful, they require reliable and accurate calculated information. This is simple

And to achieve these results, the sales, operating income and average total assets had to all increase proportionately. In the short term, this would be a good trend, but if it continues, it could be a sign that Sample Company is not keeping a big investment in assets, because not that as the denominator in this ROI calculation, a low asset figure can be used to help drive up the overall result. Meaning that if this trend continues, it may be an indication of increased operations rather than improvement in asset efficiency.

The Ratios that I am going to analyze are grouped under four main headings: 1) Profitability

Based on the 4 quarters listed above, the financial trend is wavering at best. Indicated in the first quarter reasonable increase in supply and demand by the price index ratio, but then takes a dip in the 2nd quarter, to then again increase in 3rd quarter more than the first and then later drop in the 4th. The progression suggests that this business may be subject to seasonal profits or tracking, but does not take away from the economic climate currently at hand. This is based on a composite of the accounts receivables and credit sales respectively.

That is why creative accountants undertake this phenomenon in good intentions in order to promote their companies. This is where we call it as money-spinning attractions. Companies also want to show a steady income stream to impress the investors and to keep the shares prices stable. Creative accounting also may help to maintain or increase the share price by minimizing debt level to the lower risk and by showing improved profits. This can help the company in raising new capital and in takeover attempt.

The next limitation of applying ratio analysis is the effects of inflation not taken into considerations. Financial records are made over a period of time. All of these records might not give a correct picture because of the effects of inflation are not taken into account while recording. For example, office equipment purchased two years ago was recorded at historical costs in the statement of financial position. These rates might have the different value currently due to inflation. The value of office equipment and depreciation may have different value now as it had recorded.