Ratio Analysis Essay Example | Topics and Well Written Essays - 2750 words

Ratio Analysis - Essay ExampleFinancial statement compend consists of the application of analytical tools and techniques to the data in monetary statements in order to derive from them measurements and relationships that ar meaning(a) and useful for decision fashioning (ICFAI Center for Management Research ICMR, 2004). The process of financial analysis sens be described in various ways, depending on the objectives to be obtained. Financial analysis can be employ as a preliminary screening tool of future financial conditions and results. It may be used as a forecasting tool of future financial conditions and results. It may be used as a process of evaluation and diagnosis of managerial, operating, or other problem areas. Above all, financial analysis reduces reliance on intuition, guesses and thus narrows the areas of uncertainty that is present in all decision making processes. Financial analysis does not lessen the need for judgment but rather establishes a healthful and sy stematic basis for its rational application.In the analysis of financial statements, the analyst has a variety of tools getable from which he can choose those best suited to his specific purpose. The following are the important tools of analysis.Ratios are well known and the most widely used tools of financial analysis. ... The analysis of ratios can disclose relationships as well as bases of comparison that reveal conditions and trends that cannot be detected by going through the single components of the ratio. The usefulness of ratios is ultimately dependant on their intelligent and skillful interpretation.Ratios are used by different people for various purposes. As ratio analysis mainly helps in valuing the household in denary terms, two groups of people are interested in the valuation of the firm and they are creditors and shareholders. Creditors are over again divided into short-term creditors and long-term creditors. Short-term creditors hold obligations that will soon m ature and they are come to with the firms ability to pay its bills promptly. In the short run, the amount of liquid assets determines the ability clear off true liabilities. These persons are interested in liquidity. Long-term creditors hold bonds or mortgages against the firm and are interested in current payments of interest and eventual repayment of principal. The firm must be sufficiently liquid in the short-term and have adequate profits for the long-term. These persons examine both the liquidity and profitability of the firm. In growth to liquidity and profitability, the owners of the firm i.e. the shareholders are concerned about the policies of the firm that affect the market price of the firms pedigree. Without liquidity, the firm cannot pay cash dividends. Without profits, the firm would not be able to declare dividends. With poor policies, the common stock would trade at low prices in the market. Keeping in view the above discussions regarding the category of users, f inancial ratios fall into three groups as followsLiquidity