Question

Why are trend analysis and industry comparison important to financial ratio analysis?

Answer 1

Ans ) Financial analysis :

Financial analysis refers to an assessment of the viability, stability, and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports

Trend analysis : Trend analysis is a technique used in technical analysis that attempts to predict the future stock price movements based on recently observed trend data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.

Financial ratio : Ratio analysis is a quantitative method of gaining insight into a company's liquidity, operational efficiency, and profitability by studying its financial statements. Ratio analysis is a cornerstone of fundamental equity analysis.

Importance. Trend analysis is important when examining a firm's financial statements, because financial analysts can see how company assets have grown over time.There are primary methods to analyze trends while sifting through financial statements. These are ratio analysis, vertical analysis and horizontal analysis.

• Ratio analysis compares line-item data from a company's financial statements to reveal insights regarding profitability, liquidity, operational efficiency, and solvency.
• Ratio analysis can mark how a company is performing over time, while comparing a company to another within the same industry or sector.
• While ratios offer useful insight into a company, they should be paired with other metrics, to obtain a broader picture of a company's financial health.

Importance of comparison of industry in ratio analysis :

Investors generally use ratios to evaluate companies and make comparisons between companies within an industry. Ratio analysis simplifies the process of comparing the financial statements of multiple companies. ... debt or leverage ratios (e.g., debt-to-equity and debt-to-asset ratios)