Financial ratio analysis

FINANCIAL RATIO ANALYSIS Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company’s financial statements. The level and historical trends of these ratios can be used to make inferences about a company’s financial condition, its operations and attractiveness as an investment (1994). This analysis groups the ratios into categories which tell us about different facets of a company’s finances and operations. A financial ratio gives the analyst an excellent picture of a company’s situation and the trends that are developing.

• The thesis of this study is the comparative analysis of a company’s financial statements over a certain period of time and making  an appropriate allowance for any changes in accounting policies that occurred during the same time span.


• Financial ratios compares the ratios from various fiscal periods or companies, and thus inquiring about the types of accounting policies used is crucial. Different accounting methods can result in a wide variety of reported figures.


• The thesis of this study focuses on determining whether ratios were calculated before or after adjustments were made to the income statement and these adjustments can significantly affect the ratios.


• Financial ratio analysis helps identify and quantify company’s strengths and weaknesses, evaluate its financial position, and understand the risks involved in the execution of the business.


• A ratio’s values may be distorted as account balances change from the beginning to the end of an accounting period. Usage of average values for such account must be used.

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