For Yhtomit only
eliza20
dq.docxTOPIC ONE
Trend Analysis
Why is trend analysis useful in analyzing ratios?
DISCUSSION 1
posted by KALYAN JUPALLI , Mar 02, 2016, 3:41 PM
Trend analysis is a mathematical technique used to predict or inform decisions by examining collected past data in order to detect a general pattern of a relationship between associated factors/variables, either by using tables or charts. Trend analysis is helpful in analyzing ratios because it shows changes in a particular ratio over time by allowing one to follow changes in certain specific areas like profitability and asset utilization.
According to Palepu et al., the combination of trend analysis and financial ratios can be insightful in determining financial risks and thereby allowing managers to develop competitive strategies and thus enhance the industry position of a company. This implies that by analyzing ratios, using trend analysis management, one is able to know whether they are doing better, worse or remaining in the same position (Palepu, 2013).
References
Palepu, K. G., Healy, P. M., & Peek, E. (2013). Business analysis and valuation: Text & cases. Andover: Cengage Learning.
DISCUSSION 2
In many business, comparing a certain periods of time give good insight into how the company is doing over the long term. According to the web page Boundless, "Trend analysis is the practice of collecting information and attempting to spot a pattern or trend in the same metric historically, either by examining it in tables or charts" (Boundless, 2015). In using this type of information, a company or an investor can see how the business has done in the past, comparing certain periods of time, to gain insight into how the company may do in the future. If the business shows they are a good, stable company that can grow in the future, the business itself and investors will continue invest in the company as a whole. But in other aspects, if the business shows a negative growth and shows signs of being unstable, it will show that the business may need to change its practices and may give investors the "sign" to get out of the business.
Source: Boundless. "Trend Analysis." Boundless Finance. Boundless, 21 Jul. 2015. Retrieved 01 Mar. 2016 from https://www.boundless.com/finance/textbooks/boundless-finance-textbook/analyzing-financial-statements-3/using-financial-ratios-for-analysis-45/trend-analysis-228-1449/
Words: 185
DISCUSSION 3
posted by DERRILL HIOTT , Mar 02, 2016, 8:27 PM
According to the Ready Rations website a "trend analysis is one of the tools for the analysis of the company's monetary statements for the investment purposes. Investors use this analysis tool a lot in order to determine the financial position of the business. In a trend analysis, the financial statements of the company are compared with each other for the several years after converting them in the percentage.
Apart from investments and financial data of the company, the trend analysis is also a useful tool that can be used effectively for the projections. This allows the company to conduct market research and draw trends to forecast the demand of different products. This helps in the marketing purposes, and company can deduce results to select the right marketing approach to address the issues. Trend analysis can pretty much apply to all the techniques, which requires forecasting therefore, that it is a very useful tool in business."
Reference(s)
Ready Ratios (ND). Trend Analysis. Retrieved from: http://www.readyratios.com/reference/analysis/trend_analysis.html
DISCUSSION 4
Kalyan, most industries are very competitive and as such need to gain every advantage they they can. Trend analysis is huge part of that advantage. For instance in the fashion industry if you can trend what types of clothes are popular and in what market you can target that particular market and make a huge amount of money. This applies to pretty much any retail product that is driven by supply and demand. If your an auto maker you would want to know which model was popular and in which region. An example may be that convertibles are more popular in Florida or California for obvious reasons given that information a auto maker might concentrate the delivery of convertibles to those areas. In addition they may find that pick up trucks are more popular in Texas and as such send the majority of the trucks to Texas. This is not a new concept and the use of data is a very powerful tool and translates into billions in sales annually in the global economy.
Analyzing trends can be important in the power industry as well, you can trend power usage during peek and off peek hours and use that data to determine if building a new power plant, or expanding a current one makes sense. Utility's have to buy power from other providers when there is a shortage and likewise if they have a surplus they can sell it, having extra capacity in reserves can be a very profitable thing if you understand the demand and needs in your area analyzing data is crucial to understanding that aspect of the business.
Reference:
http://www.energysmart.enernoc.com/understanding-peak-demand-charges/
TOPIC 2
Ratio Analysis
What are the general limitations of ratio analysis?
DISCUSSION 5
Terral, ratio analysis is a great tool to use in many aspects of financial data. If you are in sales you would want to know what ratio of your potential customers actually purchase your products and ultimately which products. In my business we offer many types of products and services, one such example is a control system upgrade. We have two option a migration or a rip and replace. The migration is a product that involves replacing certain electronic components in the existing control system and allows the existing system to remain, this saves money and time for the customer, however the migration does not provide all of the capability as a rip and replace, which is as it sounds we remove the old system and install a brand new one.
The time frame for the migration is about 1 week as opposed to six weeks for the rip and replace, this can equate to millions in lost revenue to the customer and is a major consideration when we enter negotiations. We use ratio analysis to guide the customer in the direction that is best for them, citing what percentage of like customers opt for the rip and replace vs the migration. We also use the data to show how the unit is more efficient post outage to show that they can earn back the investment overtime. These data tools are essential for my business.
Reference
http://article.sapub.org/10.5923.j.ijee.20120201.02.html
DISCUSSION 6
Satisfactory start, but you did not go into much breadth in covering the limitations. Your posting would definitely been improved by using research.
Although not a strictly academic source, one of the best lists of ratio analysis limitations that I have found is the following:
1. Ratios are only as informative as the financial statements on which they are based. If the underlying accounting is suspect, then the ratios will be suspect. Ratios are sensitive to changes in accounting assumptions and to "window dressing" techniques that organizations use to make their financial results look better. Furthermore, ratios are not very useful in detecting fraud (or unintentional mistakes) in the accounting system.
2. Ratio analysis is probably most accurate for organizations with a narrow line of products or services. The more complicated the organization becomes, the more difficult a good ratio analysis is.
3. Inflation can distort the financial statements (particularly the balance sheet ). Any problem in the financials caused by inflation can be passed on to ratios.
4. With some ratios it is difficult to tell where a ratio value changes from "good" to "bad." For example: How much liquidity is enough? How much is too much?
5. It is sometimes very difficult to draw overall conclusions about an organization using ratios alone. Some ratios may be very good, while others are not very good. There is no clear and systematic way to sift all of the ratio information into a single conclusion about an organization's overall health and performance.
6. Differences in accounting assumptions may make it difficult to compare ratios from different organizations. Accounting assumptions can include inventory methods such as last-in, first-out [LIFO] or first-in, first-out [FIFO] and depreciation methods like Straight Line or Double Declining Balance.
7. Differences in ratio definitions may make it difficult to compare ratios from different sources. There can be many different ways to compute the same ratio. This can cause confusion or different answers for the same ratio name.
http://ratioprofessor.com/limitations-of-financial-ratios/
DISCUSSION 7
When discussing the limitations of ratio analysis, first you must understand what a ratio analysis is. According to the web page Accounting Tools, "Ratio analysis can be used to compare information taken from the financial statements to gain a general understanding of the results, financial position, and cash flows of a business" (Bragg, 2016). Thus, by looking at information about a business, comparing it to other companies of the same type, you can see how the companies are doing.
After you have a basic understanding of a ratio analysis is, you can no see some basic limitations of this type of analysis. They are as follow:
Historical: The information is gathered from previous periods of time and may not forecast what will happen in the future.
Historical versus current cost: Costs of goods, supplies, and services change over time, thus having analysis based on previous costs will not show how current costs may affect the business.
Inflation: If inflation has changed during the periods being studied, then the results may not show the correct numbers, especially in sales.
Aggregation: The particular item (lines) you are looking at may have been put together (added) together differently in the past, thus comparing to a current line may not show a correct analysis.
Operation Changes: Companies change and how they do business also changes over time, they may update production methods, change sales methods, or change the amount of worker a company has will all affect how the business is doing, thus comparing the past with the present may not add up properly since changes have been made.
Accounting Policies: In most cases, companies will do their accounting a little different than others, thus looking at different companies may not be able to be done.
Business Conditions: As the economy changes, times of good and bad come and go, thus when you compare certain periods of time, if the economy was different, then the numbers will not show the true comparison.
Interpretation: Numbers may not add up or the understanding of those numbers may not make sense, thus sometimes a further look into the businesses may be needed.
Company Strategy: In analyzing two different companies, you must be careful because they may be following different strategies, thus having different numbers in different areas, making a comparison unattainable.
Point in Time: You need to make sure you only include the proper amount of time, especially when you are comparing financial information. If you take information from company A for a certain time, you must take the information for company B from the exact same time.
(All information based on the web page Accounting Tools)
Bragg, S. (2016). Accounting Tools. Retrieved from http://www.accountingtools.com/questions-and-answers/what-are-the-limitations-of-ratio-analysis.html
DISCUSSION 8
According to the AboutMoney page, "financial ratio analysis is one of the most popular financial analysis techniques for companies and particularly small companies. Ratio analysis provides business owners with information on trends within their own company, often called trend or time-series analysis, and trends within their industry, called industry or cross-sectional analysis.
Financial ratio analysis is useless without comparisons. In doing industry analysis, most business use benchmark companies. Benchmark companies are those considered most accurate and most important and are those used for comparison regarding industry average ratios. Companies even benchmark different divisions of their company against the same division of other benchmark companies." (Peavler, 2014)
According to Rohit Agawral in an article posted online, the limitations of financial ratios include;
"(1) Ratios are based on accounting figures given in the financial statements. However, accounting figures are themselves subject to deficiencies, approximations, diversity in practice or even manipulation to some extent. Therefore, ratios are not very helpful in drawing reliable conclusions.
(2) Ratios have inherent problem of comparability. Companies otherwise similar may employ different accounting methods, which can cause problems in comparing certain key relationships. For example, inventory turnover can be different for a company using FIFO than for the other company using LIFO method of inventory valuation.
Similarly the differences in accounting methods relating to depreciation, estimates of the life of asset, amortisation of intangibles and preliminary expenses, treatment of extraordinary items etc. can create the problem of comparability among the companies even in the same industry.
(3) Inflation may limit the utility of accounting ratios. Due to inflation, historical cost-based financial statements and accounting figures do not reflect current value figures, especially in the case of assets purchased at different dates by the different enterprises. Since financial statements are not adjusted in terms of inflation effect, accounting ratios calculated (using varying cost or prices) have distortions and become deceptive. Sometimes, gains (reflected through ratios) over time in sales, net income and other key figures disappear when the accounting data are adjusted for changes in price levels.
(4) Accounting ratios are not totally dependable and they must be used after giving due weight- age to general economic conditions, industry situation, position of firms within the industry, mode of operations, size of firm, diversity of product which can make the business enterprises completely dissimilar and thus affect the computation of accounting ratios.
(5) The different methods of computation also influence the utility of accounting ratios. The different concepts used for determining numerator and denominator in a particular accounting ratio will not help in drawing reliable conclusions even in identical situations."
Reference(s)
Peavler, R.(2014). Limitations of Financial Ratio Analysis. Retrieved from: http://bizfinance.about.com/od/financialratios/tp/limitations-financial-ratio-analysis.htm
Agarwal , R.(ND). 5 Limitations of Financial Ratios. Retrieved from: http://www.yourarticlelibrary.com/accounting/financial-statements/5-limitations-of-financial-ratios/53045/
