Question

Discuss what analytical tools you would use to judge a company’s overall financial performance. Do you favor one tool over another or weight them differently in importance?

Answer 1

There are numerous tools in the hands of the stakeholders of an organization to assess the financial performance of an organization. The financial performance can be measured by simple analysis of revenue, gross profit, operating profit and net profit of an organization and comparing these yardsticks of current year with the correspondent balances of previous years. The ratio analysis is another tool which if used effectively allows the stakeholders of an organization to assess the financial performance effectively. In case of financial performance of an organization the profitability ratios of an organization will be very helpful. Profit ratios include gross profit ratio, operating profit ratio, net profit ratio, investment return ratio and other such ratios. These ratios will help the stakeholders of an organization to assess the financial performance of an organization better.

It is up-to the users of the financial statements to decide which tools shall be given more importance than the others. A particular user of financial statement might find it easier to assess the financial performance by verifying the normal revenue, gross profit and operating profit whereas another user of financial statement might find it convenient to use ratio analysis to measure the financial performance of an organization. Thus, the final decision is on the preference and convenience of the users of the financial statement to use a particular tool over other to assess the financial performance of an organization.