Course Project Final Ratio Analysis

Course Project Final Ratio Analysis

Introduction

Entrepreneur or business owner frequently needs to analyze their business and the evaluate the performance of their business, for effective evaluation good grasp and knowledge of financial ratios gives more clear picture of the business as compared with any other tool. Financial ratios provide important information of the business in terms of various categories. For instance it provides the information about the efficiency of assets in generating revenue in terms of return on assets (ROA). There are various types of ratios used to analyze different type of information. Financial ratios posses' equal importance for investors also as these ratios is used by investors to identify favorable investment options. Financial ratios also help in identifying strengths and weakness of the business. Investor or entrepreneur, if frequently analysis the business than he can update himself according the financial condition of the business and its performance over different period of time. Financial ratios are found to be helpful tools in analysis of financial statement and forecasting for business because ratio of financial statements enables owner of the business to define particular objectives and goals and he can easily evaluate performance of the business in pursuing that goals. It is critical to carefully select the financial ratios for the business, because there are number of financial ratios available for business and industry specific. Therefore, right selection of ratios can bring fruitful results.

Discussion

(Bernstein & Wild, 1999) financial statement analysis on one or more component of organization's financial status or operating outcomes. Building blocks financial statement analysis are follows:

Short term liquidity - organization's ability to cover its short term commitments.

Cash flow and forecasting - firm's ability generates enough revenues for future outlook.

Capital structure and solvency - ability of the firm to meet long term commitments.

Return on capital employed - firm's ability to generate financial rewards to attract and maintain significant investments.

Asset turnover - strength of assets in generating significant profits.

Operating performance and profitability - optimizing operational activities in long run. It includes maximizing revenues and minimizing costs.

They further argued that building block to financial statement analysis considers:

Objectives related to analysis.

Important relation among the building blocks.

For instance, an equity investor might look for return on capital employed or invested because it focus on earning and return analysis. However, investor is to look at other block, because of their influence on specific requirement. But all six block focus on a different side of company's condition and performance. But they are interconnected with each other and the change in one block may bring significant impact on other block.

Short term liquidity

(Sinha, 2009) Focuses on the importance of short term liquidity, because firm required converting it assets into cash on to meet its due commitments. Meeting commitments on time leads firms to enjoy discounts and profitable advantages. Vice versa, if company unable to meet its commitments creates difficulties in getting profitable opportunities.

Measurement of short term liquidity

Mostly, working capital is to measure short-term liquidity because working capital is an important source for meeting ...