Ratio Analysis

Question 1

What is ratio analysis?

Answer 1

Ratio analysis is a tool used by entities applied to financial statements to evaluate the financial performance of a company.

Question 2

Why do we analyse financial statements (from an internal financial analysis perspective)?

Answer 2

To evaluate the performance of employees].
To compare the performance of different divisions].
To prepare financial projections].
To evaluate the firm’s financial performance in comparison to it’s competitors].

Question 3

Why do we analyse financial statements (from an external financial analysis perspective)?

Answer 3

Banks and other lenders].
Suppliers].
Credit-rating agencies].
Individual investors].

Question 4

List the limitations of ratio analysis?

Answer 4

Ratios are based on financial statements. They will therefore inherit the limitations of financial statements].
The SOFP is only a ‘snapshot’ of the business at a particular moment in time].
The reported values of assets will be understated in current terms during a period of inflation as they are usually reported at the original cost].
Ratio analysis is primarily based on financial data and does not consider non-financial factors that could significantly impact a company’s performance].

Question 5

What is the purpose of ratio analysis?

Answer 5

Ratios help compare current performance with previous records].
Ratios help compare a firm’s performance with similiar competitors].
Ratios help monitor and identify issues].
Ratios help with future decision-making].