FINW2T2

Ratio Analysis

Introduction

Ratios are a good way to evaluate the performance of the business and identify problems. They are good indicators of performance as they compared from the current year to those of one or more prior periods. With these ratios the performance of the company is also compared with that of competitors or other companies of similar size engaged in similar activities. The interpretation of financial ratios is fairly straightforward. This is to compare the ratio of your business with the statistics for your industry.

However, in this paper we will discuss one the problems that exist with the ratio analysis and company that has been affected by it.

Discussion

There are six aspects of the ratios analysis which shows the financial health and condition of the company these are Liquidity ratios, Profitability ratios, activity ratios, financial leverage ratios, shareholder ratios and return on investment ratios.

Kroger Co. being an American supermarket chain which was established in 1883. Kroger has continued its aggressive approach throughout the recession period, increasing establishments by more than 1.0% per year and 2.0% in 2009. As such, total company revenue has consistently been on the rise. Although Kroger just barely avoided its first revenue decline in the five years to 2010, 2011 and beyond have a very bright outlook as a result of its increase in market share in the past three years. From 2006 to 2011, the company's revenue is expected to increase an average 5.5% per year (www.fool.com).

Problem faced

The drawback of the ratios is that is does not indicates the qualitative factors rather the decision is based on the figures. For example, if the liquidity ratios are high, investors consider that the liquidity position of the company is good. Now here this ratio is not considering that larger part of the current asset is contributed by ...