The Use of Ratios in Financial Analysis

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The use of Ratios in Financial Analysis Dennis M. Pipho Sept. 23, 2014 Concordia St. Paul Cohort 2258 The use of Ratios in Financial Analysis The goal of any successful financial manager should be to maximize the value of the business for the shareholders or owners. (Droms & Wright, 2010). The way in which managers are able to determine the value of the company is through the use of financial statements. Although each financial statement focuses on a different area or length of time, the shared piece of information that in some way is depicted by every financial statement and the way the shareholder value is calculated is ultimately cash. Financial statements are simply the framework of a financial picture created over a given period of time. Through the use of such tools as ratio analysis, a financial manager is able to make the best possible decisions for the company Ratio uses and Benefits Ratios are used to take the information from the financial statements and make sense of them in such a way that is useful for a particular organization. “Financial ratios can be used to develop a set of statistics that can reveal key financial characteristics of a company “(Droms, & Wright, 2012, p. 88). Ratios allow managers to compare companies of unequal size, determine its rank within the industry, and compare performance of a single company from year to year. Before attempting to utilize ratios to analyze financial statements, managers must clearly understand the purpose of each financial statement and its content. The income statement is a statement that depicts movement of cash over a period of time and provides information of the revenues and expenses in order to determine liquidity. Liquidity is the ability to turn assets into cash quickly. Two of the most frequently used ratios which draw from the income statement are the current ratio and
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