Finance Paper_2007 - Ratio & Financial Statement...

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How these financial management tools are used to determine a company’s performance, strengths and weakness; what are the benefits and limits of using such tools; and the upcoming trends in financial analysis. Prepared for MGMT 640 Introduction of Finance Electronic copy submitted on: 11/13/2007 Prof. Sadiq
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Executive Summary There are several tools for accessing a company’s stability, profitability, performance and reliability. The analysis of financial ratios helps determine a company’s financial position and estimate future cash flows, gains, losses, failures and successes. The main objective is to provide meaningful interpretation of a company’s line of business and where it’s headed in the future. This information is not only vital to investors, but also to managers who are ultimately responsible for maximizing shareholders’ value. By analyzing financial statements of a company, professionals can determine its strengths and weakness and access overall profitability. This process involves closely examining the company’s financial statements, such as annual reports, balance sheets, cash flow statements, income statements, shareholder’s equity and a variety of other paperwork to define financial ratios that allow experienced analysts to interpret and forecast a firm’s financial position. The main concern of using ratio analysis is the misinterpretation of numbers. Translating physical assets to numbers is not a precise process, and following accounting strict standards should be a primary focus of any company’s accounting and financial departments. In order to effectively and accurately determine a company’s profitability or reliability, one must understand what that company actually does; what products or services they offer, what its strategies and business core are. Hence, analyzing financial statements does not only involve defining ratios and interpreting them, but also learning about a company’s business, its management, structure, values and mission. In addition, analyzing ratios in a vacuum should always be avoided. After all, ratios are nothing more than one number divided by the other. To be properly interpreted they must be compared with similar parameters. Although it may seem obvious to state that one should only compare apples to apples, a lack of research on a company’s competitors and its specific industry can profoundly alter an analysis of its financial statements considering that ratios vary tremendously among industries and each industry has its own average ratios. An accurate financial analysis should be developed over time, after extensive banks of data and information have been collected and by experienced financial professionals, who are not biased and understand the overall impact of their reviews to the company and its market. On the other hand, financial statement analysis can be extremely useful and reliable. The ability
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This note was uploaded on 07/25/2010 for the course FIN MGMT640 taught by Professor Sadiq during the Fall '07 term at Universidade Federal do Rio de Janeiro.

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Finance Paper_2007 - Ratio & Financial Statement...

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