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Financial Ratio Analysis

January 20, 2012
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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.

Financial Ratio analysis

Continuing with our example:

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.

Advantages of Financial Ratio Analysis

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.

Disadvantages of Financial Ratio Analysis

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.

Financial Ratios Templates to download

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!


About the Author

Pankaj Baheti is a CFA Level III Candidate currently working with Pristine. Prior to Pristine, he was working with Achi Group. He has done his Post Graduate Diploma in Management and loves trekking in the hills of Arunachal.


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