Financial Ratio Analysis Notes Essay - 662 Words

3-2 Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios? Managers use financial statements to monitor measurements like debt leverage, costs, sales, assets and liabilities. Financial statements help managers assess achievement of financial goals. Analysis of financial ratio helps equity investors to know whether their investment earnings any return or not. The emphasis would be placed on whether the company earning higher or lower return compared to previous year, the industry average and the biggest competitors within the same industry. Analysis of financial ratios assists Short term creditors to†¦show more content†¦Think particularly about the turnover ratios, the profit margin, and Du Pont equation. Profit margin is the ratio between revenue and income. Business with higher profit margin have lower cost of sales and therefore a high profit while business with lower profit margin have higher cost of sales. Thus businesses with a low margin needs to have high volume to sales to make up for the low margin. Turnover ratios show how many times a year company is replacing their inventories or collecting their debtors. Higher turnover indicates that company is producing and selling their products quickly and lower turnover ratio indicates that company is producing and selling their products late. Grocery chains like Safeway are business that have lower profit margin, high turnover ratio and therefore a higher volume of business transaction whereas a steel company is a business that has a higher profit margin, low turnover ratio and therefore a lower volume of business transactions. 3-6 Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry? 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