3. 3
1
• Ratio Analysis: Introduction
2
• Financial Ratio Classification
3
• Balance Sheet
4
• Income Statement
4. 4Ratio Analysis
Ratios may be compared with:
Past periods for the
same business
Similar businesses for the
same or past periods
Planned performance
for the business
• Determination: improvement
or deterioration in
performance
• Track particular ration over
time
• There is always the possibility
that trading conditions were
quite different in the periods
being compared
• the performance of a single
business over time, operating
inefficiencies may not be
clearly exposed
• Survival may depend on its ability to
achieve comparable levels of
performance
• Competitors may have different
year ends and so trading conditions
may not be identical
• They may also have different
accounting policies (for example,
different methods of calculating
depreciation or valuing inventories)
• it may be difficult to obtain the
financial statements of competitor
businesses
• The comparison of actual
performance with planned
performance can be a useful
way of assessing the level of
achievement attained
• Those outside the business do
not normally have access to
the business’s plans. For
them, past performance and
the performances of other,
similar, businesses may
provide the only practical
benchmarks
5. 5Financial Ratio Classification
Liquidity Efficiency Profitability
Indicate a company’s
short-term debt-paying
ability
Financial Gearing /
Equity / Solvency
Investment / Share
Indicate the ability of
directorsto control the
activity and assets
Relate income to other
variables
Show relationship between debt
and equity financing in a
company
Help assess relative meritsof
stocks in the marketplace
7. 7Example: Balance Sheet (cont.)
Assets
current assets
total
property and equipment
total
Assets Total
8. 8Example: Balance Sheet (cont.)
Liabilities and stockholders' equity
current liabilities
total
long-term liabilities
total liabilities
stockholders' equity
total paid-in capital
retained earnings
total stockholders'equity
Liabilities and stockholders' equity Total
9. 9Example: Income Statement
Gross margin = net sales – cost of goods sold
= 450000 – 127000 = 323000
Net operating income = gross margin –
operating expenses
= 323000 – 249000 = 74000
Net income before taxes = net operating
income – interest expense
= 74000 – 8000 = 66000
Net income = net income before taxes – less
income taxes
= 66000 – 19800 = 46200