FIN4060 Week 1 Project

Ratio Analysis

The �rst step for performing an in-depth �nancial statement analysis is ratio analysis. You can use ratio

analysis to ascertain whether the business: is pro�table, has enough money to pay its bills, can pay its

employees higher wages, is paying its share of tax, and is using its assets ef�ciently.

Ratio analysis isn't just about comparing different numbers from the balance sheet, income statement, and cash �ow statement. It is about comparing these numbers against previous years, other

companies, the industry, or even the economy in general. Ratios look at the relationships between

individual values and relate them to how a company has performed in the past and might perform in

the future.

The categories of ratio analysis include liquidity, ef�ciency, debt, and pro�tability ratios.

Liquidity ratios deal with the company's position related to cash—and needed for working capital management. Examples include current ratio, also known as working capital ratio and acid test ratio,

also known as the liquid ratio or quick ratio.

Ef�ciency ratios deal with the company's management effectiveness in using resources. Examples

include accounts receivable turnover, �xed asset turnover, sales to inventory, and accounts payable to

sales

Leverage ratios deal with the company's �nancial position vis-à-vis obligations. Examples include

typically relate to debt, equity, assets, and interest expenses. The commonly used one is the debt-to- equity ratio.

Pro�tability ratios deal with the company's attractiveness to investors and its ability to fund its growth

needs.

The background of a �nancial statement analysis is the �nancial market. A �nancial statement analysis

forms the foundation for sound decision-making throughout the �nancial market. The quality of the

decision-making process depends on the degree to which the related �nancial information is accurate.

The �nancial market may be de�ned as the setting where those who supply funds may interact with

those who need funds. There are four categories of �nancial markets:

Money and capital

Primary and secondary

Foreign exchange and foreign capital

Depository and non-depository