This paper examines financial ratio analysis by defining, the three groups of stakeholders that use financial ratios, the five different kinds of ratios used and their applications, the analytical tools used in analysis, and finally financial ratio analysis limitations and benefits.
The paper illustrates that financial ratio analysis is an important tool for firm’s to evaluate their financial health in order to identify areas of weakness so as to institute corrective measures.
While financial ratio analysis does contain limitations that include little theory to guide them as well as the use of accounting data based on historical costs that may not reflect a firm’s true economic conditions, it is an excellent tool for different stakeholders to use for different goals that will remain in use in the area of financial management.
Companies prepare and furnish financial statements on a regular basis to their stakeholders that report on their financial standing. However, the accounting information by itself is not easily analyzable and effective in determining how a particular company is doing financially by itself or in relation to others in the industry. Financial ratio analysis is the use of financial statements to evaluate a company’s overall performance and assess its strength and shortcomings (Jiambalvo, 2009). It is a tool used to evaluate the overall financial health of firms and is approached from different perspectives by creditors, managers, and stockholders. The three different groups are all interested in the profitability of the firm but take on different perspectives. Stock holders invest in firms with the intention of maximizing the value of their stock, earning dividends, and generally maximizing their return on investment. Managers are responsible for the day to day running of the firm and have a fiduciary responsibility to the owners to make decisions that are in the owner’s best interests. They are therefore interested in... [continues]
Cite This Essay
(2011, 04). Ratio and Financial Statement Analysis. StudyMode.com. Retrieved 04, 2011, from http://www.studymode.com/essays/Ratio-And-Financial-Statement-Analysis-656718.html
"Ratio and Financial Statement Analysis" StudyMode.com. 04 2011. 04 2011 <http://www.studymode.com/essays/Ratio-And-Financial-Statement-Analysis-656718.html>.
"Ratio and Financial Statement Analysis." StudyMode.com. 04, 2011. Accessed 04, 2011. http://www.studymode.com/essays/Ratio-And-Financial-Statement-Analysis-656718.html.