Financial Statement Analysis

    • The analysis of a ratio gives the relationship between two variables at a point of time and over a period of time. There are three kinds of ratios and they are - liquidity ratios,profitability ratios,ownersip ratios.Liquidity ratios measure the short term liquidity of the firm with the help of ratios like current ratio,quick ratio and turnover ratios.Profitability ratios measure the operational efficiency of the firm.They give the details of how efficient the firm is in applying its resources to get the maximum returns. Ownership ratios help the present or future stockholder in assessing the value of his investment.Earning ratios,leverage ratios (capital structure and coverage ratios) and dividend ratios fall into the category of ownership ratios. Leverage ratios measure the long term solvency of the firm.They are further divided into capital structure ratios and coverage ratios.

    • Du Pont analysis divides a particular ratio into components and studies the effect of each and every component on the ratio.Comparative analysis gives an idea where a firm stands across the industry and studies its financial trends over a period of time. The final step in analysis is the interpretation of the data and measures assembled as a basis for decision and great deal of judgment,skill and effort.

    • Though there are limitations to financial statement analysis,it is the only means by which the financial realities of an enterprise can be reduced to a common denominator that can be quantified and mathematically manipulated and projected in a rational and disciplined way.