Comparative Ratio Analysis
- Pages: 2
- Word count: 330
- Category: Investment
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Comparative and ratio analysis are two of the most common types of analyses used in examining a company’s fiscal records, and both used the same information contained in a firm’s financial statements. This paper is written better understand the role of each type of analysis in evaluating a company this paper expounds on such involvement. Definition Ratio analysis assesses the association among the different components of a firm’s fiscal report. It converts quantitative information found in financial statements into ratios for a more significant differentiation of various performance period of a company. It identifies trends over time for the company and can be used to compare several companies at a specific point in time. Comparative analysis is an item-by-item comparison of the different component found in a financial statement. The comparison is done on a financial statement item over several accounting periods which can help identify any changes in the firm’s operations and results. Purpose
The purpose of the comparative and ratio analysis is to determine a company’s financial health and evaluate its performance during a specific period. The comparative analysis allows investors to see the actual earnings of a company whereas ratio analysis allows investors to use formulas such as liquidity, solvency and profitability in order to determine its success (Kimmel, Weygandth, & Kieso, 2009). Importance
Comparative and ratio analysis allow a company to compare its own performance over periods of time in relation to other companies and to itself. This information is important in evaluating a company’s weaknesses, and make judgment as to how efficiently its assets are being utilized. Conclusion
The financial standing, performance, and valuation for a company compared to other company can be better appreciated and interpreted correctly by using the comparative and ratio analysis. Investors and management use the results to base their investment or business decisions, respectively.
Kimmel, P. D., Weygandth, J. J., & Kieso, D. E. (2009). Accounting (4th ed.). Hoboken, NJ: John Wiley & Sons, Inc..