Ratio Analysis:Commonly Asked Questions.
This article focus on some commonly asked questions on Ratio Analysis:
In my forthcoming articles on Ratio Analysis, I shall be tabulating useful major financial ratio into the following compartments for easy assimilation:
·        formula,
·        how is it to be used,
·        scores or values,
·        interpretation and comments
Now let’s start with the Commonly Asked Questions:
1.                  What is Ratio analysis?
- Ratio analysis involves methods of calculating and interpreting financial ratios to assess a firm’s financial condition and performance.
2.                  Who is interested in Ratio analysis?
- Since it’s able to assess a firm’s financial condition and performance, hence it is of  interest to shareholders, creditors, and the firm’s own Management.
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3.                  How many types of Ratio comparison?
There can be broadly classified into three (3) types:
- Trend or Time-Series Analysis
- To evaluate a firm’s performance over time
- Cross-Sectional Analysis
·        To compare one firm’s financial performance to the industry’s average performance. Cross-sectional analysis is used to compare different firms at the same point in time.
- Combined Analysis
·        Combined analysis simply uses a combination of both time series analysis and cross-sectional analysis
4.                  What are the cautions in using Ratio Analysis?
- Ratios must be considered together;
- Financial statements that are being compared should be dated at the same point in time.
3.  Use audited financial statements when possible.
4Â Â Â Merely numbers & data hard to get.
5Â Â Â Â Â Â Â Â Be wary of inflation distortions, historical cost, different accounting policies, management manipulation & different definitions
5Â Â Â Â Â Â Â Â It is difficult to define categorically what a good or bad ratio value should be.
5.                  How many types of Financial Ratio Classifications?
Broadly classified into:
- Liquidity
- Asset Management
- Profitability
- Financial leverage management
- Market based
- Dividend policy
- Bankruptcy – Altman Z
- Ratio Analysis And Commonly Asked Questions
- Share Buyback: Commonly Asked Questions
- Ratio Analysis : What Other Factors, Beyond Ratios, Need To Be Considered?
- Ratio Analysis: Which Ratios Have the Most Value?
- All Topics Under The Heading Of Financial Accounting Ratio Analysis Or The Interpretation Of Financial Statements In The Annual Report
- Ratio Analysis Of A Company
- Competitive Analysis Using Financial Ratio Analysis
April 5, 2006
Posted in: Ratio Analysis
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