Question

What are the various ways you can analyze financial statements? Hint: Vertical and common-sized are the same thing. Which method do you believe is used most often internally? Why? Which method do you believe is used most often by external stakeholders? Why? Of the different general types of ratios, liquidity, solvency, profitability, etc., which do you think are the most useful by the various stakeholders? Why?

Answer 1

Financial statement analysis help to find out the present and future earning capacity of a concern.The various types of financial statement analysis can be made on the basis of (1) the nature of the analyst and the material used by him - internal and external analysis(2) the objective of the analysis- Long term and Short term analysis (3) the modus operandi of the analysis-Horizontal and vertical analysis.

Internal analysis made by those persons who have assess to the books of accounts.They are members of the organizations.Internal analyst can give more reliable information than the external analyst because every type of information at his disposal.

Ratio analysis is most commonly used by investors and external stake holders for analising concerns performance..it is the process of dertermining and presenting the relationship of items and group of items in the financial statements.The important types of ratios are (1) profitability ratios(2) Turnover ratios(3)Financial ratios (4)Leverage ratios.

Profitablity is an indication of the efficiency with which the operations of the business are carried on. Poor operational performance may indicate poor sales and hence poor profits. Bankers,Financial institutions and other creditors look in to the profitability ratios as an indicator whether or not the firm earns substantially more than it pays interest for the use of borrowed funds and whether the ultimate repayment of their debts appears reasonably certain.owners are interested on profitability as it indicates return which they can get on their investments.Important profitability ratios are return on investment,Earning per share,price earning ratio,Gross profit and net profit ratios, pay out ratios and dividend yield ratio.

Turnover ratios are important for a concern to judge how well the facilities at the disposal of the concern are being used or to measure the effectiveness with which a concern uses its resources at its disposal. It normally used by owners and investors.Important ratios are sales to capital employed ratio,sales to fixed asset ratio,sales to working capital,stock turnover, debtors and creditors turnover ratios etc.

Financial ratios are used to judge the financial position of the concern for long term as well as short term solvency point of view.The important ratios are current ratio,quick ratio,debt to equity ratio,propriety ratio,capital gearing ratio,fixed asset ratio etc . These ratios used by investors, bankers and financial institutions and creditors.

The important ratios used to analise a concern are debt to equity ratio,current and quick ratio,return on investment and net profit ratio.