Question

What are the key components of financial statement analysis? If you were an investor, which ratio would you focus upon? Explain.

Answer 1

Key component of financial statement analysis are as follows:

1. Balance sheet:it gives the financial position of company at a point.

2. Income statement: it gives the financial performance of the company over the year.

3. Cash Flow statement: It talks anout whether the company is providing enough cashflow form its operating actvity or not.

One should perform ratio analysis, trend analysis and common statement analysis to find the performance of the firm with respect to other firm and with respect to previous year performance.

If I were a investor then I will look following ratio:

1. Price to earning ratio: It will tell the price of share with respect to per unit of earning.

2. Price to sale ratio: It will tell the price of share with respect to per unit of sales. higher value signifies that each unit of sales will generate more price appriciation.

3. Debt to equity ratio: it will tell about the capital mix of the firm and also tells how much debt carrying by firm to run its business.

4. Current ratio: It tells about wether company is liquid enough to service its short term debt. Value should be greater than 1.

5. PEG ratio: it is price to earning to growth ratio it takes care of growth of the company into the consideration .

6. asset Turnover ratio: It will tell the efficiency of firm wether the company is generating enough sales from its per unit asset.