Financial Statements and Ratios

Financial Statements and Ratios

Use of Ratios in Analyzing Financial Statements

Financial ratios are used to evaluate the strengths and weaknesses of an enterprise in terms of its financial position. A financial ratio is used as a magnitude for two different variables taken from the financial statements of an enterprise. There are many ratios which are standard ratios in accounting used to evaluate the financial position of a business. These ratios are often used by the management for evaluating their performance for the period. Financial ratios are used by different stakeholders, having their varied interests in the business, for example creditors use financial ratios in order to evaluate the liquidity position of the business in order to determine that there money would returned timely or not. Stockholders use these ratios to determine the profitability over the firm which they would expect to earn over their investment. The shares which are traded in the stock market, the market price reflects the ratios in the shape of share price.

There are various ratios in order to analyze the financial statements such as:

Liquidity Ratios- It can be used to identify corporation ability to meets its short term obligations through short term assets.

Profitability Ratios- It can be used to identify corporation ability to generate profits on their investments.

Efficiency Ratios- It can be used to identify how efficiently corporation is utilizing its assets.

Financial Leverage Ratios- It can be used to identify its debt and equity ratio which enables to mange risks within its operations and get higher returns.

Profitability ratios help users of an entity financial statements determine the overall effectiveness of management regarding returns generated on sales and investments (Manley, 2009). Efficiency ratios are known as the ratios that measure the effectiveness of management decision making and evaluate turnover and the return on investments (Manley, 2009).

These ratios help different stakeholders to understand the financial performance and position of a business in varied terms. Various stakeholders have different use for financial ratios. Shareholders can able to understand corporations' performance and dividends they can earn on their investments. Lenders and borrowers of corporations are in view whether they will get their payment on time from corporations through estimating its liquidity and leverage ratios. All ratios which have been calculated can be used for the purposes of comparing with competitors in order to analyze company growth in comparison to its competitors. It also helps in designing dividend policy for corporation.

Benefits of using the ratios when analyzing the balance sheet, income statement, and cash flow statement of an organization

Financial ratios serve as tools which are used to evaluate the strengths and weaknesses in terms of its financials. These are done by performing basic calculations by using the data from different financial statements such as balance sheet, income statement and cash flow statement. Ratios are used to measure the efficiency of the company, its liquidity position, profitability and stability of the organization by giving the confidence to the investors and the relevant information which serves as the basis ...