What tools can be used for financial statement analysis? What do these tools tell you about financial performance? What kinds of business decisions can be made using these tools?

Please use an example from your accounting experiences if possible.

Financial statement analysis is a process of finding a company’s’ strengths and weaknesses by analyzing the company’s’ balance sheet and profit and loss statement. An analysis is used to make investment and credit decisions, asses cash-flow prospects, report enterprise resources, claims to those resources, and changes in them, to report economic resources, obligations, and owners’ equity, to report enterprise performances and earnings, to evaluate liquidity, solvency and flow of funds, to evaluate management stewardship and performance, and to explain and interpret financial information. The tools that can be used for financial statement analysis are financial ratios. Financial ratios evaluate the relationship between financial statement elements and are most useful when compared to previous years’ results, competitor company results, industry averages, or benchmarks. The ROA ratio measures the percentage return on the asset employed by a company, and the ROA can be broken down into two components: the profit margin ratio and the asset turnover ratio. A company can improve its return on assets ration by increasing its PMR and/or ATR. Profitability ratios measure the results of the company’s’ business operations overall performance and the strength of the firm. When analyzing a company’s’ financial rations; it can be determined whether that company has a high or low ROA due to a larger or smaller turnover ratio. Analyzing two companies side by side can determine which come has the higher profit margin ration and can decide which of the two companies to invest in or merge with.

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