Chapter 9Foundations of FinancialRatio AnalysisWHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school Chapter 9 Foundations of Financial Ratio Analysis
Financial statement analysis should not belimited to the assessment of sources anduses of funds. Another tool used to gauge thefinancial health of a business is financialratio analysisa financial ratio is the comparison of differentfigures which appear on a balance sheet oran income statementWHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school Financial statement analysis should not be limited to the assessment of sources and uses of funds. Another tool used to gauge the financial health of a business is financial ratio analysis a financial ratio is the comparison of different figures which appear on a balance sheet or an income statement
1.ls this company able to meet its current debtobligations?2.Are the company's assets being managedeffectively?3.Are the business's accounts receivable andinventory at suitable levels?4.Will the company be able to meet its long-term debtcommitments?5.ls the company profitable?6.How does the company's financial structure andprofitability compare with those of others in theindustry?Z.Are the shareholders'return on investmentwhusatisfactory?Accountingdepartmentofmanagementschool
WHUT Accounting department of management school 1.Is this company able to meet its current debt obligations? 2.Are the company's assets being managed effectively? 3.Are the business's accounts receivable and inventory at suitable levels? 4.Will the company be able to meet its long-term debt commitments? 5.Is the company profitable? 6.How does the company's financial structure and profitability compare with those of others in the industry? 7.Are the shareholders' return on investment satisfactory?
Ratio analysis: cautionary notes(1)Economic assumptionsProportionality assumptionfixed costs(2)BenchmarksOptimal levels Industry norms as benchmarks(3)Timing and window dressingonly at specific points in timeseasonal businesswindow dressingWHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school Ratio analysis: cautionary notes (1)Economic assumptions Proportionality assumption fixed costs (2)Benchmarks Optimal levels Industry norms as benchmarks. (3)Timing and window dressing only at specific points in time seasonal business window dressing
Four broad ratio categories:(1)Activity analysis(2)Liquidity analysis(3)Long-term debt and solvency analysis(4)Profitability analysisWHUTAccountingdepartmentofmanagementschool
WHUT Accounting department of management school Four broad ratio categories: (1)Activity analysis (2)Liquidity analysis (3)Long-term debt and solvency analysis (4)Profitability analysis