Ratio Analysis Evaluating Past Performances and...

â€Å"In spite of its limitations ratio analysis is widely used as a means of evaluating the past performance and predicting the future successes or failures of business organisations.† Ratio analysis isn t just picking different numbers from the balance sheet, income statement, and cash flow statement and comparing them. Ratios compare facts against previous years, the industry, other companies, or even the economy in general. Ratios look at the relationships between values and relate them to find out how a company has performed in the times of yore and might perform in the future. The echelon and chronological trends of these ratios can be used to make inferences about a company s financial condition, its operations as well as the†¦show more content†¦The non bank ratio is used by a firm where the firm cannot afford to get more credit from banks. This ratio is assumed to be of greater risk as if the firm cannot pay back the loan to the bank, it will probably charge a higher interest. Interest payments are subject to the primary earnings of a firm (as regarded by some financial analysts), so the interest must be calculated as the percentage of sales of tha t firm or alternatively the total costs as the percentage of the previous year’s earnings. The analysis that an investor gets from these ratios affect the decision making of their investment into any firm associated. Now let us talk about the hierarchical usage of ratios in the firms. The production manager in a firm is not required to have full information about the firm rather he is more concerned with the liquidity ratios such as repayment of debts, cost of raising long term debts or an alternative to equity. His main focus is to maximize the efficiency of the production of the firm in order to maintain profitability. If today for example: the management decides to sell 75% capacity of the production well he (Production Manager) would simply adjust the production accordingly. The comptroller management is responsible to gather the reports of the current payments that the firm has made and the current income that the firm has received. It is different from overall management which is required to supervise the short term and the long term trends of the firm.Show MoreRelatedFinancial Analysis : The General Electric Company1696 Words   |  7 PagesFinancial analysis gives the clear outlook of the performance parameters of an organization. It helps in evaluating and comparing the present as well past performance. This analysis is an important tool for the management, investors as well as the outsiders who deal with organization. This analysis presents the way of functioning and the direction in which an organization is moving. The analysis is done with the help of common size analysis, comparative analysis and Ratio Analysis. 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