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.
