Ratio Analysis "Evaluating Past Performances and Predicting Future"

Topics: Financial statements, Cash flow, Asset Pages: 4 (1508 words) Published: May 24, 2008
“In spite of its limitations ratio analysis is widely used as a means of evaluating the past performance and predicting the future successes or failures of business organisations.”

Ratio analysis isn't just picking different numbers from the balance sheet, income statement, and cash flow statement and comparing them. Ratios compare facts against previous years, the industry, other companies, or even the economy in general. Ratios look at the relationships between values and relate them to find out how a company has performed in the times of yore and might perform in the future. The echelon and chronological trends of these ratios can be used to make inferences about a company's financial condition, its operations as well as the attractiveness as an investment. Financial ratios are calculated from one or more pieces of information from a company's financial statements. They investigate thoroughly the financial condition of a business and can assist in making a decision about whether a company has the financial backup to support the console and achieve success or not. Financial ratios are a suitable system of evaluating or assessing the current financial health and its related performance of a company relative to similar companies in the same industry. Users of financial ratios use the traditional balance sheet and income statement to determine the liquidity, leverage, asset activity, profitability and performance of companies. It should be provided that both companies are similar to each other and the basis of calculation of ratios is the same because inter-firm comparisons provide a more meaning, objective and controlled way of evaluation. Now these inter-firm comparisons can be used as identifying the strengths and weaknesses of company related to a particular industrial sector. These comparisons can be analysed by either internal management or external users such as stakeholders, investors and creditors. There are several sources of getting inter-firm...
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