Write about the company's profitability. One of the most popular ratios used to gauge profitability is net income margin, which is net income divided by sales. If net income margin goes up, discuss why and by how much. If net income margin goes down, discuss why and by how much.
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Calculate the company's leverage or debt level. One of the most popular debt ratios is debt to equity. Divide total liabilities by total equity, both of which can be found on the balance sheet. The higher the ratio, the more debt the company has compared to equity. In general, rising debt is a bad sign and vice versa. If the ratio goes up, explain the cause of the increase and how much it went up in both dollar and percentage terms. Do the same if the ratio goes down. 4
Research the company's liquidity (access to cash). One of the most popular liquidity measures is referred to as working capital. Working capital is current assets minus current liabilities. Both of these line items can be found on the balance sheet. In general, a high or increasing working capital means the company has good liquidity, and a low or negative working capital means the company has poor liquidity. 5
Write a concluding summary. Include at least three recommendations for upper level management in terms of improving financial performance based on the ratios.
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