Question

1. Ratio analysis 

A company reports accounting data in its financial statements. This data is used for financial analyses that provide insights into a company's strengths, weaknesses, performance in speific areas, and trends in performance. These analyses are often used to compare a company's romance to that of its competitors, or to its past or expected future performance. Such insight helps managers and analysts improve their decision making. 

Your boss asked you to analyze Green Hamster Manufacturing's performance for the past three years and prepare a report that includes a benchmarking of the company's performance. Using the company's last three years of financial reports, you've calculated its financial ratios, including the ratios of Green Hamster Manufacturing's competition - that is, comparable ratios of other participants in the industry-and submitted the report.

Along with calculating the ratios, what else is needed for your report?

• Making observations and identifying trends that are suggested by the ratio analysis

• Identifying the factors that drive the trends in the ratios

• Both of the above

Ch 04 Assignment-Analysis of Financial Statements 

Most decision makers and analysts use five groups of ratios to examine the different aspects of a company's performance. Indicate whether each of the following statements regarding financial ratios are tue or false? 

Statement True False 

A company exhibiting a high liquidity ratio means it is likely to have enough resources to pay off its short-term obligations. 

Asset management or activity ratios provide insights into management's efficiency in using a firm's working capital and long-term assets. 

Debt or financial leverage ratios help analysts determine whether a company has sufficient cash to repay its short-term debt obligations. 

One possible explanation for an increase in a firm's profitability ratios over a certain time span is that the company's income has increased. 

Market-value or market-based ratios help analysts figure out what investors and the markets think about the firm's growth prospects or current and future operational performance. 

Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry.

However, like many tools and techniques, ratio analysis has a few limitations and weaknesses.

Which of the following statements represent a weakness or limitation of ratio analysis? Check all that apply.

• Market data is not sufficiently considered.

• Window dressing might be in effect.

• Seasonal factors can distort data.

Answer 1

1) It is option C both of above. since we need to trend analysis of ratios calculated and also the qualitative factor deciding the trends in ratios
2)True
true
false
ture
true

3)It is option B and C
Option A is not correct as for ratio analyis we use financial data present inside the company

Answer 2

First part:

Ratio analysis will be fruitful and serve its intended purpose only when the related information is furnished along with it. This is to enable the appropriate authority to take suitable decision based on the information received from ratio hence. Hence both the following, as stated in the question, are needed:

• Making observation and identifying trends that are suggested by the ratio analysis
• Identifying the factors that drive the trends in the ratio.

Second part:

1. High liquidity ratio means the company is likely to have enough resources to pay off its short term obligations. Hence the statement is TRUE
2. Asset management or activity ratios provide insights into the management’s efficiency in using the firm’s working capital and long term assets. Hence the statement is TRUE
3. Debt or Leverage ratios measure the relation between owner’s contribution and debt in the firm. This indicates the ability to repay the total liabilities from own sources including internal capital formation. However, this does indicate the ability to pay off short term dents specifically. Hence the statement is FALSE
4. Profitability ratios indicate the relation between the profit (gross profit or net profit, as the case may be) and sales. Income is generally referred to profit before tax. Hence one of the reasons for increase in profitability ratios could be the increase in income. Hence the statement is TRUE.
5. Perception of the investors and market regarding the firm’s future prospects and current and future performance has important role in determining the market price of the share. Hence the market value and market related ratios help the analysts to figure out what the investors think about in this regard. Hence the statement is TRUE

Third Part:

All the three stated features represent weakness or limitation of ratio analysis:

1. Window dressing
2. Market data is not sufficiently considered (especially in the case of shares not actively traded)
3. Temporary or seasonal factors may distort the results, throwing wrong signals.