Ratio and Financial Ratio Analyisis

1712 Words Mar 13th, 2014 7 Pages
Ratio and Financial Statements Analysis
Kimberly Y. Gruber
University of Maryland University College
Dr. Sunando Sengupta
07/25/2013
Turnitin Score: 23%

Executive Summary
The purpose of this paper is to examine ratio and financial statement analysis. Such analysis is a useful tool for managers and stakeholders to evaluate a company’s financial health in order to identify opportunities for growth and areas of weakness so as to institute corrective measures. Financial statements are used in order to predict trends of cash flow within the business as well as predict the potential of a business and if they are capable of financial growth. Ratio analysis examines the probability of a company’s profit or a company’s loss. This
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Financial statement and ratio analysis is also used to drill down within the larger financial performance of the company as a whole to evaluate various divisions and product or service lines. These analyses are critically important as they are often used to enhance the firm’s credibility in the larger marketplace; assist in determining its own creditworthiness; and comparing its performance to that of potential competitors.
In examining company reports the focus is primarily on revenues (gross profit), and net income (earnings after expenses). For example, Apple Inc., might be interested in conducting a detailed evaluation of its revenue in order to isolate the amount being generated by various products (i.e., the sales of the iPhone compared to the iPad). The revenue report might even assist in identifying the underlying issue, such as lack of advertising, if there is a wide disparity in sales. Evaluating net income helps the financial manager ascertain the amount of profit that the company ultimately gained after expenses, such as manufacturing and advertising, are taken into account. Apple, Inc. can then use the results of these evaluations to make cost-benefit judgments that could lead to new marketing campaigns, redesign, or even potential elimination of a product line.
Types of Ratio Analysis Traditionally the current ratio and the quick (acid test) ratio were used to analyze the short term

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