ratio analysis Essay -- essays research papers

Financial Ratios What They MeanIn assessing the significance of various financial data, managers of hug drug engage in ratio analysis, the process of ascertain and evaluating financial ratios. A financial ratio is a relationship that indicates something astir(predicate) a companys activities, such as the ratio between the companys current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the companys financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only meaningful when compared with some other data. Since they are often compared with perseverance data, ratios help managers understand their companys consummation relative to that of competitors and are often used to trace performance over time.Ratio analysis can reveal much about a company and its operations. However, there are several points to keep in mind about ratios. First, a ratio is just one number divided by another. Financial ratios are only "flags" indicating areas of strength or weakness. One or even several ratios might be misleading, but when combined with other knowledge of a companys management and economic circumstances, ratio analysis can tell much about a corporation. Second, there is no single shed light on value for a ratio. The observation that the value of a particular ratio is too high, too low, or just right depends on the perspective of the psychoanalyst and on the companys competitive strategy. Third, a financial ratio is meaningful only when it is compared with some standard, such as an industry course of action, ratio trend, a ratio trend for the specific company being analyzed, or a stated management objective.In trend analysis, ratios are compared over time, typically years. Year-to-year comparisons can highlight trends and point up the need for action. Trend analysis works best with three to five years of ratios.The second type of ratio analys is, cross-sectional analysis, compares the ratios of two or more(prenominal) companies in similar lines of business. One of the virtually popular forms of cross-sectional analysis compares a companys ratios to industry averages. These averages are developed by statistical services and patronage associations and are updated annually. Some of these sources will be covered later in this guide.Financial ratios can also give mixed signals about a companys fina... ...h ratio is also given. Almanac of Business and Industrial Financial Ratios. Leo Troy. Englewood Cliffs, NJ Prentice-Hall, Inc. Annual. (REF HF 5681 .R25 T7)The source of all data are tax returns filed with the U.S. Internal Revenue Service. The most recent edition covers approximately 4.7 million active corporate federal income tax returns, including those owned or controlled by foreign persons. The publication profiles corporate performance in two analytical tables for each industry. Table I reports operating and financ ial information for all corporations, those with and without can income. Table II provides the same information as Table I, but only for corporations with net income. It provides 50 performance indicators for each industry. At the end of each industry section, performance indicators for the last ten years are shown. Data are grouped into 16 categories by size of assets in each industry. About 180 lines of business are covered.Norms in actual dollars for revenue and capital factors such as net receivables, inventories, and total assets are given. It also gives average operating costs in percent of net sales for cost of operations, pensions and benefits, comp