Ratio and Financial Analysis

Running Head: RATIOS AND FINANCIAL ANALYSIS
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RATIOS AND FINANCIAL ANALYSIS

Ratio and Financial analysis
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The way we manage our finances mostly is depended on how we handle them. A lot can go wrong if we handle our finances carelessly without being accountable for how we use them. Analysis helps us to know how we use and save our finances and it is mostly useful in organizational settings. Ratio analysis is done by comparing two elements of a financial statement. The results of the analysis will provide a rich data concerning both the items compared to when the two items are studied separately. Mostly it involves analyzing interrelationships. There are various classifications of financial ratios they include; profitability, liquidity, management, efficiency, leverage and valuation and growth. Financial statement analysis is done so that a company can make better economic decisions. It involves analyzing the financial statement of a company, the statements that are analyzed include; balance sheet, income statement, that is what the company acquires in terms monetary values after they offer their services, cash flow and a statement pertaining retained earnings.
Ratio and financial statement analysis have their benefits and limitations, some of them includes, they give a company an insight to its activities and the finances that are available and helps them to make sounds decisions concerning future investment of the company. They also help the management to keep track how money is being used and expose any kind of mismanagement. The down side to this includes among others, sometimes the process of analyzing may take a lot of time and can be a very tiring process. Analyzing requires someone who knows how to think in a critical way and sometimes due to lack of skills, it could be done wrongly and the information that is acquired can cause the company to experience a lot of loses. (Dodd & Graham, 1998).
Below is a deep discussion concerning financial ratios and how they can benefit an organization in terms of its relationship with the public and the investors? Financial statement involves evaluating the risks that can be taken by a company and how these risks can affect the company in both positive and negative way. It also involves checking the financial health of a company and come up with ways to better its state if the financial position of that company is unhealthy, it also analyzes the future prospects of the company such as, investment choices, expansion in term of the range the services are being offered this can include geographical range and also the chance of increasing the number of manpower that are required to improve the way the services are being offered. Generally it deals with all areas that are affected by financial stability in a company. Some of the groups that are interested with financial statements include the government, creditors and investors among others. Investors study the financial statement of a company so that they can determine whether it is beneficial to invest in a particular company and the security of their investment funds in future ( White, Sodhi & Fried, 1998).
There are different methods that can be used to analyze the financial statement of a company they include; fundamental analysis, Du point analysis, horizontal and vertical analysis and the use of financial ratios. Horizontal analysis involves comparing other financial statements of the same company in the last period of years can be done quarterly. Vertical analysis on the other hand involves listing each item and expressing it as a percentage of the gross income. After this a horizontal analysis can be conducted on these percentages to determine the direction in which the company is heading in terms of profits. Ratio analysis is a very powerful tool in conducting financial analysis, there are about four categories of these ratios they include; liquidity, this is determining how fast a company can turn its assets into hard cash within as short period of time. Liquidity ratios can be very helpful during hard times such as bankruptcy and financial difficulties. The second category is profitability ratios; these ratios determine how company is profitable. It calculates ways in which a company can come up with to even beat their start- up costs.
Activity ratio shows the activities of the workers of a company and how well they are doing their jobs, for example managers. There are two types of activity ratio; accounts payable turnover and accounts receivable turnover. They can also be used to predict how long a company will take to achieve its goals basing on the accountability and skills of the workers. Also how long it will take for the company to receive its payments. Leverage ratio is the last category of financial statement, it involves analyzing how much a company depends on debts to fund its operations an example of this is the debt-to-equity ratio (Dodd & Graham, 1998).
Part of the model that has been developed for the application of the financial statement and ratio analysis is a Dividend discount model (DDM). This model is used to value the stock price of a company. It theorizes that a company’s stock is worth the sum of its dividend payment, generally it is used to value the company’s stock based on future dividends and the present value of a company’s net income. Both financial analysis and ratio analysis have their upsides and downsides (Dodd & Graham, 1998). Analyzing financial statements of a company is dependent on a company honesty concerning their finances and how it is used, on the occasion that the company has hidden investment that is not known to the public, the financial statement can be unbalanced causing the company to be in a state of confusion or experience a lot of loses. It also requires that the person analyzing the financial statement has all the financial statement from since the company began and this can be a lot of data and if he is using the horizontal analysis method then the process will be time consuming.
However the advantage of keeping financial records is it helps the company to know its current position and set achievable financial goals. If the analysis is done frequently, it supports honesty and prevents any actions of embezzlement from those dealing with finances as the financial analysis is done frequently. Lastly it helps the company to make the necessary steps towards the development of the company in terms of investment options. It also helps the workers in the company to take their job seriously as their output will be analyzed and given feedback. Financial ratios are not very useful when they are viewed in isolation, they cannot be analyzed in isolation. The different accounting treatments that are used by different companies may make it difficult to use the methods that are suggested under ratio analysis. The above discussed methods of analysis can be applied in various department in the company, some of the areas that that are most useful include, making decision concerning investments, they can also be used in a bank credit company especially while giving out loans to companies, the banks can use this information to determine whether it will be wise to offer a company financial aid by analyzing the values of their assets. Having the knowledge about financial statement and ratio analysis is not enough, one needs to also check on the options that they have before they can invest or ask for loan.
Financial statement helps investors to know how safe a company is to determine whether they will invest in it or not. A company that keeps a clear record of their financial statements helps the public to gain trust concerning their deals, it also helps the company to work effectively without having to ask for loans or other types of debts so that they can fill up the gaps of financial lack. Companies should take financial and ratio analysis in a very serious way because they contribute a higher percentage to the proper functioning of the company.

References.
White, Gerald I, Sondhi, Ashwinpaul; Fried, Dov (1998). The analysis ad use of Financial Statements. John Wiley & Sons, Inc.
Dodd, David; Graham, Benjamin (1998). Security Analysis. John Wiley & Sons, Inc.
www.simplilearn.com/financial statement- analysis-rar25-article.