Ratio Analysis
ANALYSIS OF FINANCIAL STATEMENTS
Financial statement analysis is the study of relationships between the elements of the same statement or different financial statements and the trend of these elements. The purpose of financial statement analysis is to determine the meaning and significance of the data contained in the statements so that a forecast may be made of the prospects for future earnings, expected dividends and the ability of the business to pay interest and debt as it matures. Financial statement analysis involves rearrangement of financial information, comparison, analysis and interpretation of that information.
Financial statement analysis can be external or internal; horizontal or vertical; and intra-firm or inter-firm.
Analysis done by the management to assess the financial health of the organization and its operational efficiency is called internal analysis. Analysis carried out by parties external to the organization such as investors, credit rating agencies, government agencies etc. is called external analysis. Horizontal analysis compares financial data over a number of years to analyze the trend. Vertical analysis is based on the financial data of a particular year. Inter-firm analysis compares financial variables of two or more firms to get an idea of their relative competitive position. Intra-firm analysis compares the performance of different units of the same firm.
Techniques of Financial Analysis:
The following techniques can be used for analyzing the financial statements:
(i) Comparative Financial Statements:
Figures of two or more periods are placed side by side. Comparison of absolute as well as percentage change in the figures over the periods is made to derive meaningful conclusions.
(ii) Common–size Financial Statements:
All figures of a financial statement are expressed as a percentage of a common base which is taken as 100. This common base is the sales figure in case of Profit and Loss Account and
Financial statement analysis is the study of relationships between the elements of the same statement or different financial statements and the trend of these elements. The purpose of financial statement analysis is to determine the meaning and significance of the data contained in the statements so that a forecast may be made of the prospects for future earnings, expected dividends and the ability of the business to pay interest and debt as it matures. Financial statement analysis involves rearrangement of financial information, comparison, analysis and interpretation of that information.
Financial statement analysis can be external or internal; horizontal or vertical; and intra-firm or inter-firm.
Analysis done by the management to assess the financial health of the organization and its operational efficiency is called internal analysis. Analysis carried out by parties external to the organization such as investors, credit rating agencies, government agencies etc. is called external analysis. Horizontal analysis compares financial data over a number of years to analyze the trend. Vertical analysis is based on the financial data of a particular year. Inter-firm analysis compares financial variables of two or more firms to get an idea of their relative competitive position. Intra-firm analysis compares the performance of different units of the same firm.
Techniques of Financial Analysis:
The following techniques can be used for analyzing the financial statements:
(i) Comparative Financial Statements:
Figures of two or more periods are placed side by side. Comparison of absolute as well as percentage change in the figures over the periods is made to derive meaningful conclusions.
(ii) Common–size Financial Statements:
All figures of a financial statement are expressed as a percentage of a common base which is taken as 100. This common base is the sales figure in case of Profit and Loss Account and