Ratio Analysis

Introduction to Finance

Question

1. How to make ratios meaningful

Ratio analysis is defines as a tool to evaluate business performance of a corporation. Hence, financial statement can be interpreted by using ratios and perspective of it could be used to analyze, control and even improve performance of a company. Generally, primary purpose of ratios is to point out areas of weakness and strengths so further investigations can be made. On top of that, figures obtained through ratios can help managers study the efficiency of operations and the risks encounter, so effective actions could be taken immediately. In brief, financial ratio is a guide to a company. Individual ratios are usually of a very limited value. Ratios by themselves are not that helpful and meaningless A big figure ratio by itself cannot be said that the firm is performing well because it has to be depending on other companies’ performance as well. Thus, ratios to be really useful, comparison are a must. Therefore, ratios calculated need to be compared with other companies’ ratios in order to determine that the figure obtained is good or bad. Actually, there are many ways of comparing could be done:-
1. Comparison between present with previous results
2. Comparison between present with forecast
3. Comparison with other competitors
4. Inter-firm comparison (IFC)
5. Comparison with industry market leader

1.   Comparison between present with previous results
Firstly, comparison could be done by comparing the current year performance with previous years to determine trends the firm is moving towards. Through this, corporation can also analyze whether the businesses had increase or decrease. If it is bad, further actions that necessary can be taken immediately to boost back the businesses that fall. Take a corporation, Bell Bhd as example. Let say the Bell Bhd current ratio of 2008 is 2.5 times meanwhile in 2007 the ratio is 2.3 times. By looking both results it can be said that the...