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FINANCIAL ANALYSIS

Financial ratio

The principal tools of financial analysis are financial ratio. Ratios are
mathematical aids for evaluation and comparison of financial
performance. Financial ratios are computed based on the firm’s financial
statement. They are used to summarize the information in a company’s
financial statement in assessing its financial health.

Objective of ratio analysis

1. To standardize financial information for comparison purposes

2. To evaluate current operations of the company

3. To compare present performance with past performance

4. To compare with other firms or industry standards

5. To assess the efficiency of operation

6. To assess the risk of operations

Types of comparison

1. Internal comparison

2. External comparison

Internal comparison

Internal comparison is an analysis based on comparisons of similar ratios
for the same firm. It compares present ratios past and expected future
ratios. The objective of internal comparison to analyze the financial
condition and performance of the firm over time.