Ratios are a tool for expressing the relationship between various accounting data that can be used for both internal and external comparisons. Financial Ratio analysis as a whole is used for evaluating the financial condition and performance of a business.
Suppose your chocolate business is now two years old, and you want to compare your organizations performance with the competitors and also your past performance with the current years. So you called your accountant and asked him the way to do so.
Your accountant suggests to you the ratio analysis and also narrates its advantages and disadvantages of it.
1. Helpful for forecasting the future earnings and cash flows.
2. Helpful in comparative analysis.
3. It helps in evaluating the financial position and operating efficiency of a business.
1. Financial Ratios are only meaningful when compared to the historical performance or externally to other firms.
2. Different firm follows different accounting principles which make comparisons among firm meaningless.
I have created a Financial Ratios template for you, where the subheadings are given and you have to link the model to get the cash numbers! You can download the same from here. You can go through the case and fill in the yellow boxes. I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded).
Also you can download this filled template and check, if the information you recorded, matches mine or not!
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