What are financial ratios?

  

Ratio Analysis Financial ratios represent a way of avoiding problems involved when comparing companies of different sizes. These ratios assist in comparing and investigating the relationships between different pieces of financial information. From the text, you have read about several types of financial ratios As you write your paper, you will be in the role of an analyst who is attempting to put ratio analysis into a context which helps explain a certain aspect of this concept.Upon completion of this research paper, you will demonstrate your ability to:Demonstrate a fundamental understand of financial statement analysis. Appropriately use basic ratio tools to interpret and evaluate financial statements.Research Paper:Begin by choosing a topic area in ratio analysis that appeals to your desired learning objectives or career goals. Potential Topics:Select one of the financial statements and relate it to at least two sources from Virtual Library to your discussion of these statements.Choose one of the ratios presented in the readings and apply research material to the discussion of that ratio.Discuss the DuPont ratioDiscuss the topic of BenchmarkingThis research paper should be 3- 5 pages in length and it should analyze an aspect of ratio analysis.Attached are the course notes,theymayhave some added value.
Module 1
Introduction to Finance
In this first chapter, we will learn about modern corporate
finance and financial management. We will study the role and
goal of the financial manager in corporations. Additionally, it is
important to understand different types of corporate
organizations with their advantages and disadvantages.
More specifically, after studying this chapter you should be able
to explain:

The basic types of financial management decisions and the role of the
financial manager
The goal of financial management
The financial implications of the different forms of business organization
The conflicts of interest that can arise between managers and owners
We will continue our study of Corporate Finance in this module in preparation for the
quiz that will cover both Chapters 1 and 2. We will learn about financial statements,
taxes, and cash flow. We will not emphasize preparing financial statements; instead we
will look at financial statements as a key source of information to help us make
decisions.
Chapter 2 establishes the basis for our study of Financial Statements, Taxes and Cash
Flow. We will learn that the interconnections of the different management activities that
can be seen through careful study of the financial statements. We utilize ratios to
evaluate the relationships and measure the changes in the financial statements. You
will see how preparing the financial statements for tax purposes are much different than
preparing the statements for our shareholders.
More specifically, after studying this chapter you should be able to describe:

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The difference between accounting value (or book? value) and market
value.
The difference between accounting income and cash flow
The difference between average and marginal tax rates
How to determine a firm’s cash flow from its financial statements.
Module 2
Working with Financial Statements
In Chapter 3, we will learn about the tools we apply to financial
statements to help us understand how a company runs. We will
learn how to look at financial statements and understand the
elements of each of the three major statements (income
statement, balance sheet and cash flow statement) and the
relationships within those statements.
Why do we need this information? Simple, financial statements
represent the language of business. We use these to communicate to government
agencies, investors and internally to other managers. Lets learn the language of
business.
More specifically, after studying this chapter you should be able to explain:
The basic types of ratios used in financial statement analysis (FSA)
The measures used by organizations to gage efficiency
The methodology of common-sizing statements and reading a financial
statement
In Chapter 4, we learn what is financial planning in the corporate sense and which
models are used in managing the finances of a company. We will learn the answers to
these questions as well as how external financing leads to growth of a company. These
are the essential tools and missions of managers in a corporation and either as an
employee or an investor we all need to understand these items.
Chapter 4 helps us understand how to prepare and utilize pro forma statements, sales
forecasts, asset requirements, use economic assumptions and put these all together in
models to aid in managing a company or understanding if a company is managed
properly. We will understand what financial planning can accomplish in the business
environment.
More specifically, after studying this chapter you should be able to describe:
The mission of management in the financial planning process.
The tools at our disposal to plan and manage a company.
The manner in which budgets are developed for sales and asset needs
assessments.
How to determine a firm’s cash flow from its financial statements.

Introduction: In the world of finance, financial ratios are considered an essential tool in analyzing and comparing companies of varying sizes. A financial ratio is a technique adopted to analyze financial statements by comparing two or more items from the financial statements in an attempt to draw conclusions about a company’s liquidity, profitability, and solvency. As a financial analyst, your role is to utilize ratio analysis to put financial information in context that helps to understand different aspects of a company’s financial health and performance.

Description: The research paper focuses on exploring different aspects of ratio analysis and its importance in financial statement analysis. The paper requires the demonstration of fundamental knowledge of financial statement analysis and the ability to use basic ratio tools to interpret and evaluate financial statements. The paper topics revolve around reviewing different financial statements and ratios such as the DuPont ratio and Benchmarking, and examining various sources to discuss and analyze their financial implications. The research paper should be 3-5 pages and serve as a comprehensive analysis of an aspect of ratio analysis. The course notes attached to the module provide an added advantage in preparing the research paper, which should demonstrate a deep understanding of financial management decisions and the different financial implications of various forms of business organizations.

Ratio Analysis – Objectives and Learning Outcomes

Objectives:

– To develop a fundamental understanding of financial statement analysis.
– To learn how to appropriately use basic ratio tools to interpret and evaluate financial statements.
– To conduct research on a specific topic area related to ratio analysis.
– To analyze an aspect of ratio analysis and present findings in a concise and coherent manner.

Learning Outcomes:

Upon completion of the research paper, the learner will be able to:

– Demonstrate a fundamental understanding of the key principles underlying financial statement analysis.
– Use basic ratio tools to interpret and evaluate financial statements, making informed decisions based on the findings.
– Analyze a specific aspect of ratio analysis, such as benchmarking or the Dupont ratio, and apply research material to the discussion of that ratio.
– Discuss the financial implications of different forms of business organization, including the conflicts of interest that can arise between managers and owners.
– Understand the difference between accounting value and market value, accounting income and cash flow, and average and marginal tax rates.
– Determine a firm’s cash flow from its financial statements and evaluate the relationships between different pieces of financial information.

Headings:

– Introduction to Ratio Analysis and Financial Statement Analysis
– Basic Ratio Tools and their Interpretation
– Research Topic Selection and Analysis
– Financial Implications of Different Forms of Business Organization
– Understanding of Accounting Value, Income, and Tax Rates
– Analysis of Cash Flow in Financial Statements

Solution 1: Discuss the DuPont Ratio
The DuPont Ratio is a financial ratio that provides a comprehensive overview of a company’s financial standing, equity, and revenue generation. This ratio is computed by dividing the Return on Equity (ROE) into three key components: net margin, asset turnover, and financial leverage. Research material such as academic journals and financial reports can help in the analysis and interpretation of this ratio.

Solution 2: Applying Benchmarking in Financial Ratio Analysis
Benchmarking is the process of comparing a company’s performance against industry standards or similar companies in the same industry. In financial ratio analysis, benchmarking can provide valuable insights into a company’s strengths and weaknesses. For example, by comparing a company’s current ratios and debt ratio with those of its competitors, investors and financial analysts can assess whether the company is performing well within the industry or what areas it needs to improve in. In this solution, research material can be used to explore the significance of benchmarking in financial ratio analysis in comparison to other methods.

Suggested Resources/Books:
– “Financial Statement Analysis: A Practitioner’s Guide” by Martin S. Fridson and Fernando Alvarez
– “Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet” by Axel Tracy
– “The Interpretation of Financial Statements” by Benjamin Graham

Similar Asked Questions:
1. What are the advantages of using financial ratios for analyzing companies of different sizes?
2. How can financial ratios be used to evaluate the relationships between different pieces of financial information?
3. What is the DuPont ratio and how can it be used for financial analysis?
4. How can benchmarking be used in financial ratio analysis?
5. What are the basic types of financial management decisions and the role of the financial manager?

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