In this topic we will be exploring the important question : “How do we know that an organization is doing well financially?” Absolute profit is usually compared to some measure of the resources used to product it. We will be looking at a number of accounting ratios and how they are used will introduced. Ratios help to explain and explore the performance and risks an organization is taking to return a result. It is important to familiarize yourself with financial ratios and understand how to calculate and interpret them.
Some key financial ratios are:
The probability – resources ratio
The debt - equity ratio
The interest coverage ratio
Determining the right level for a ratio is done by:
Comparing an organization to itself over a period of time and examine the trends
Benchmarking against other organizations in the same industry
Topic 3: Ratios & Financial Analysis
After studying this topic students will be able to:
Calculate the ratios widely used in financial statement analysis;
Analyse financial statements;
Explain the concepts of gearing and debt/equity ratios;
Calculate ratios commonly used by shareholders to evaluate corporate performance.
