Ratio Analysis

Topics: Generally Accepted Accounting Principles, Balance sheet, Financial ratio Pages: 7 (1280 words) Published: October 13, 2009
Contents page

Introduction……………………page1

Literature review………………page 2

Uses of ratios…………………...Page 2

Types of financial ratios………Page 3
➢ Profitability ratios……….Page 3
➢ Efficiency Ratios………....Page 4
➢ Liquidity Ratios………….Page 5
➢ Investment Ratios………..Page 6

Limitations of ratios…………..Page 8

Conclusion……………………..Page 8

Introduction.

The primary purpose of accounting is to convey information about the business to management, investors, shareholders, government and other interested parties. However absolute numbers in isolation are generally meaningless. The uses of financial ratios enable these figures to be related to other figures so as to put them into perspective. A ratio is a diagnostic tool that helps to identify problem areas and opportunities within a company.

Literature Review.

Shillinglaw Gordon et al (1979), asserts that the basic building block in financial statement analysis is the ratio, a percentage or decimal relationship of one number to another. Swanson Ross et al (1988), is of the idea that, “Financial analysis is crucial to managers in order to make decisions about operating a business”.

The Uses of Financial Ratios.

✓ Managers use them to analyse past results to control their business and plan for the future, in budgeting for example. Trends in the same business over a number of years will show whether it is progressing or deteriorating. ✓ Investors use the ratios to compare their investors with alternative forms of investments. Results in one business may be compared with results of other businesses; this is also known as inter-firm comparison, so as t5o see if it is performing well. ✓ They are also used by government statisticians who compile tables of national statistics on industry performances. ✓ Financial analysts compare ratios against the industry norm, aggregate economy and the economy’s past performance. They would be working for the financial press, trade associations and trade unions. ✓ Bankers and finance houses also use these ratios to assess the credit worthiness of a business.

The Types of Financial Ratios.

Financial ratios are very useful to stakeholders. These are individuals and institutions who are interested in the business’s information. The most widely used ratios, by financial analysts, provide insight into a firm’s profitability, liquidity, value and the degree of financial leverage or debt.

i. Profitability ratios

Profitability ratios measure the amount of, and consistency of earnings. This is an important measure of business success.

Return on Equity (ROE) =Earnings before tax and profit Total shareholder equity

|Premier Bank |Barclays Bank |Stanbic Bank |CABS | |US$ |US$ |US$ |US$ | |-94321 |661341 |551738 |6064316 | |7529638 |30792601 |12899373 |30332309 | | | | | | |=-1.25% |=2.15% |=4.78% |=-0.2% |

Return on Equity is the measure of return earned on the finance laid out. Premier Bank had a negative percentage of -1.25%. This simply means that it had a loss. CABS Bank was also unable to make a profit on the equity provided. Stanbic Bank provided the highest percentage showing that it had the greatest return an shareholders funds.

ii. Efficiency ratios.

Profitability and continued growth...
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