Ratio, Vertical, and Horizontal Analyses

Financial Statement Analysis is the process of reviewing and analyzing a company’s financial statements to make better decisions. These statement includes the Income statement, Balance sheet, Statement of cash flows and a statement of changes in equity.

Ratio analysis is the method used to calculate and interpret financial ratios to analyze and monitor the firm’s performance.

To analysis financial statements there are various tools. Ratio analysis is one of them. In ratio analysis we establish relationship between two or more items of financial statements and derive some vital information about the business.

To find the current ratio you need to look on the company’s balance sheet. You take the current total assets and divide by the total current liabilities. This gives you your current

Ratio analysis is a tool brought by individuals used to evaluate analysis of information in the financial statements of a business. The ratio analysis forms an essential part of the financial analysis which is a vital part in the business planning. There are 3 different ways of assessing businesses performance and these are: solvency, profitability and performance. Ratio analysis assists managers to work out the production of the company by figuring the profitability ratios. Also, the management can evaluate their revenues to check if their productivity. Thus, probability ratios are helpful to the company in evaluating its performance based on current earning. By measuring the solvency ratio, the companies are able to keep an

There are three steps needed to prepare a financial analysis. The first step is to establish the facts about the organization, which would include reviewing the financial statements such as the balance sheet, statement of operations, statement of changes in net assets and the statement of cash flows. The second step is to compare those facts over time, to the facts of similar organizations and to include vertical, horizontal and ratio analysis in the process. Ratio analysis includes liquidity, profitability, activity and capital structure. The third step in preparing a financial analysis is to use judgement and perspective to evaluate the comparisons and make decisions (Norwicki, 2015).

Ratio Analysis -- Using key relationships among financial statement items. Ratios organized into the four (items A through D below) building blocks of analysis:

Analysis of financial statements is necessary to understanding performance. According to Investopedia (2015), there are two methods of analysis, trend or horizontal analysis and vertical analysis. As horizontal analysis is a comparison over a period of time, vertical analysis compares items within a specific financial statement based on a total amount, such as assets or liabilities. Common size financial statements are utilized to conduct vertical analysis (Vitez, 2015). With the amount of comprehensive information available, business managers are better equipped to make

For the purpose of evaluation, there are some financial ratios which are calculated and the analysis of the results shows the performance of the company over the years. Financial analysis is the evaluation and interpretation of the financial data. This analysis is important for investment and financial decision making. This financial can be internal to the company for check and balance and for the measurement of the employees performances. This financial ratio calculation

Ratio analysis is a useful tool for analyzing financial statements. Calculating ratios will aid in understanding the company’s strategy and in understanding its strengths and weaknesses relative to other companies and over time. They can sometimes be useful in identifying earnings management and in understanding the effect of accounting choices on the firm’s reported profitability and growth. Finally, the ratios help in obtaining a better understanding of a firm’s current profitability, growth, and risk which can improve forecasts of future profitability and growth and estimates of the cost of capital.

Financial statement analysis helps managers to better understand the financial health of their companies. Managers compute and interpret financial ratios for asset management purposes, debt management purposes, to assess profitability and to assess their market performance versus other companies.

Current Ratio: measures if company can pay its short-term responsibilities. It is used to show if the company has the ability to pay back his short-term liabilities. As high the current ratio is so accomplished is the company to pay. When the ratio is less than 1 it means that the company can not pay its obligations (http://www.investopedia.com/terms/c/currentratio.asp).

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.

Current Ratio is the relationship between a company’s current assets and current liabilities. This form of liquidity ratio also shows if the company can pay its current liabilities. A company’s current ratio can be formulated by dividing the current assets by the current liabilities. In 2016, Starbucks had a ratio of 1.05, which shows that the company has 5% cash and assets that could cover all current liabilities, thus it should not have any problems paying its current liabilities.

Financial analysis is done by using financial statements of a company to analyze its financial position and performance, and to assess its future financial performance. It thus shows how items in the company’s financial statements relate to its financial performance objectives. (Principles of Accounting, Needles et al, 12th Addition)