Financial Ratio Analysis

Download Financial Ratio Analysis for Excel - A tool that helps compare up to four firms for stock analysis, using nine standard financial ratios calculated from the firms’ annual report data.

BIZStrat STRATEGIC MANAGEMENT Financial analysis ratios - Provides examples and explanations of profit, liquidity, activity, leverage, and shareholder-return ratios.

Bizwiz Ratio Analyzers - Excel spreadsheet systems; financial statement ratios, income statement analysis, inventory management and business valuation

Finance impacts on all segments of an organization. It acquires funds, allocates resources and track performance. In a profit-oriented company, the financial statements form the basis for the shareholder’s assessment of management’s records. It becomes a focal point for managerial attention, decision making and accountability.

However, if people aren’t able to link financial strategy with operational strategy, it’s hard for them to see the implications of one for the other – example,  where the tight control of working capital can restrict stock availability for customers.  So it is important to find a way to engage all business managers in the financial view of the business. Only then you can be sure that they are making the best use of its resources.  This is where financial ratio analysis can assist to interpret the financial picture in layman’s language for business managers to grasp  the financial implications of  business decisions.

Financial ratio analysis  therefore allows you to understand the financial statements and develop a better understanding of financial implications resulting from business decisions, helps to create business strategies and develop a thorough understanding of the financial drivers in your business. The interpretation of  financial and accounting  ratios gives you an understanding of the key drivers behind the financial performance of the business. It clarifys the impact of changes to  crtitical drivers and your bottom line through financial modeling and enables you to develop and test financial and commercial objectives to improve your business.

The identification and knowledge of all vital financial data will enable you to have a comprehensive understanding of your businessess operational performance, and enable you to measure its success.  Financial ratio analysis enable you to identify and measure the most critical business performance measurements. These mainly cover  five aspects of  a business which are profitability, balance sheet & working capital, cash flow, return on assets & investment, and funding requirements.

Accounting is often called the language of business and as such,  it is very important for all staff to be familiar with this very critical functional area. Business people should be competent in the understanding and the use of accounting information for financial ratio analysis.

They must comprehend the nature and purpose of accounting,the ways accounting events are measured, recorded and reported and how accounting information is used by both internal and external decision makers. It is necessary to develop skills in analyzing accounting reports using financial ratio analysis and evaluating organizational performance and skills in analyzing costs for product costing and pricing and in making other short term decisions

So what are the critical numbers usually highlighted  by financial  ratio analysis?  The majors ones would be gross margin and profit before tax  for profitability focus. collection period and inventory turnover to highlight efficiency, total debt to equity ratio and current ratio to represent solvency.  One of the most comprehensive financial ratios  for a company would be the divident yield ratio. The gearing ratio, asset turnover ratio, profit margin, effective tax rate and payout  ratio all correspond to key steps in the bsuiness process.

A small-business guide to balance sheet analysis.