Ratio Analysis

Topics: Financial ratio, Ratio, Financial statements Pages: 7 (1949 words) Published: March 15, 2013

1.0 Background of the Study

In the past decade of economic tendency, Malaysia as one of the developing countries in Asia has confronted various changes and enlargement. Achievement of Malaysia industry deeply affects the economic status of Malaysia. The movement of foreign exchange will increase when investors involve in it. Investors will always invest in good conduct industry because they will earn revenue in the short time period. However, investors need to recognize or to analyze the performance of the company properly before invest and it is not an easy job for an outsider to understand.

By doing the financial statement analysis, it will help the analyst to understand the performance of any company. The analysis of financial statement is a study of establishing meaningful relationship between various financial facts and figure given in financial statement. The basic financial statement included balance sheet and income statement which is the indicating device of profitability and financial soundness of business concern. Simple and valuable elements have been dissected by complex figure that given in financial statement. In addition, significant relationships are established between the elements of the same dissection. Establishing relationships and interpretation thereof to understand the working and financial position of a firm is called analysis of financial statement. Thus, analysis of financial statement is the procedure of establishing and identifying the financial weakness and strengths of the company.

1.1 Meaning of Ratio Analysis

Ratio analysis has been view as a primary technique of the analysis of financial statement from various aspects of business. (Brigham & Houston, 2004 p. 95)state” Ratio Analysis involves comparisons. A company’s ratios are compared with those of other firms in the same industry, that is, to industry average figures.” Ratio refers to the relationship expressed in mathematical term among a set of numeral and two individual links with each other in logical way. It is based on the assumptions that single figure may not tell us any useful information but when expressed relative to another figure, it will definitely give us some meaningful information. Since ratio is a mathematical relationship between two or above accounting figures, it can be expressed in as a pure ratio, as a rate of times or as a percentage. The relationship between two and above accounting figures or group is called financial ratio. Financial ratios may be calculated in different ways, using different figures (Gibson and Cassar, 2005). Financial Ratio helps to outline a large volume of financial data into a concise form so it is easy to interpret and conclude the performance and position of the firm.

1.2 Ratio Analysis

There are two steps that ratio analysis needs to be follow. First, the calculation of ratio has to be done. Second, the ratio has to compare with predetermined standards. Predetermined standards can be the average ratio of industry or the same firm past ratio. When interpreting specific firm, the calculated ratio has to compare with the predetermined standard otherwise the analyst cannot attain any effective conclusion. There are cross section analysis, time series analysis and combined analysis three types of different way in comparison the ratio. In cross section analysis, it helps the analyst find out how the particular firm has performed associated with the firm’s competitor by using the ratio of the firm to compare with the ratio of other firms in same industry or more firm’s financial ratio at the same time. In addition, the firm also can undercover the major operational inefficiencies by comparing the firm’s performance to compare with the top performance of the industry. Time series analysis helps the firms to measure whether the firm is near to the long-term goals or not by comparing the present performance with the past performance of the firm. A...
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