financial ratios Flashcards
what is Ratio analysis
Ratio analysis involves comparing one figure against another to produce a ratio,
and assessing whether the ratio indicates
a strength or a weakness in a company’s’ affairs
what should ratio analysis consist of ?
Ratio analysis should incorporate comparative information including
ratios within the same company over time to try to identify a trend, comparison of ratios with similar companies to assess how a company is performing relative to its’ competitors.
what is the objective of financial statements ?
The objective of financial statements Is to provide information about the financial position, performance and financial adaptability of an enterprise that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions.
where can you find financial information
Financial Position obtained from a
Balance Sheet
Performance-
from the Income Statement,
Statement of recognised gains and losses,
Cash Flow Statements
Financial adaptability-
All four of the above, financial adaptability
is the ability of the enterprise to react,
alter, adapt, to respond to unexpected events
and opportunities.
The main users and their information
needs are identified as……..
WHO?
Investors
As the providers of risk capital to the enterprise,
are interested in information that helps them to assess the
performance of management.
They are also concerned with the risk inherent in,
and return provided by, their investments, and need
information that helps them to assess the ability of the
enterprise to pay dividends, and to determine whether they
should buy, hold or sell their investments.
Employees
Are interested in their livelihood-
are interested in information about the stability
and profitability of their employers.
The ability of the enterprise to provide remuneration,
employment opportunities and retirement benefits.
Lenders
Are interested in information that enables them to
determine whether their loans will be repaid,
and the interest attaching to them paid when due.
Suppliers and Other Creditors
Are interested in information that enables them
to decide whether to sell to the enterprise and to
assess the likelihood that amounts owing to them
will be paid when due.
Trade Creditors are likely to be interested in an
enterprise over a shorter period than lenders unless
they are dependent upon the continuation of the
enterprise as a major customer.
Customers
Have an interest in information about the
continuance of an enterprise, especially when they
have a long-term involvement with,
or are dependent on, the enterprise.
Government and their agencies
Are interested in the allocation of resources and,
therefore, the activities of an enterprise.
They also require information in order to regulate
the activities, assess taxation and provide a basis
For national statistics.
The public
Enterprises affect members of the public in a
variety of ways.
They may make a substantial contribution to a
local economy by providing employment and
using local suppliers-
creating other small businesses/ local employment.
RATIOS
There are endless numbers of ratios that could be calculated, and the subject area is constantly developing- the most recent trends towards non-financial data, and more detailed reports.
The calculation of ratios is a starting point for the interpretation of a set of accounts, but calculation of the ratios is only one part of the process of reviewing performance.
Ratio analysis on its’own is insufficient to allow a full interpretation of company accounts
RATIOS In addition:
-some sort of SWOT analysis is required-
Strengths, Weaknesses, Opportunities and Threats.
-Review of Directors Report, Chairman’s Statements
