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FINANCIAL ANALYSIS

External comparison

External comparison involves comparison of ratios of a firm with ratios of
a firm with ratios of other firms in a similar industry. This is also called
inter-firm comparison @ cross sectional analysis. For example a firm may
want to analyze its performance relative to its competitor to know its
standing in the industry. External comparison is important as it will enable
the company to identify its strength and weaknesses as compared to its
competitors. The company will be able to improve its performance

Users of financial statement

1. Shareholder/owner

These users are interested in the profits earned, financial health
performance and potential growth of the company. They want to ensure
that they get good returns from their investment. They want to know
whether there is an increase in the value of their shares. They need to get
these statements to identify the firm’s strength and weaknesses for
remedial action and future planning.

2. Managers

Managers are hired by owners to manage the business on their behalf.
They have to ensure that they manage the business effectively and
efficiently so that owner’s wealth is maximized.

3. Creditors/lenders

Creditors consist of those who supply goods and services on a credit basis
as well as bank providing loans to companies. Supplier wants to ensure
that they are able to get timely payment. Banks are interested not only in
the firm’s profitability but also its ability to repay loans.