Financial analysis refers to the assessment of a firm's financial status and performance, aiding in

making educated business judgments. This involves utilizing financial statements like the
balance sheet, income statement, and cash flow statement to compute ratios and other
indicators to evaluate the firm's profitability, liquidity, solvency, and operational efficiency.
(Warren,2022)
Various ratios can be utilized for financial analysis, and the most commonly used include:
Profitability ratios: These gauge a company's profit-generating capacity. Key profitability ratios
comprise the profit margin, return on assets (ROA), and return on equity (ROE).
Liquidity ratios: These ratios determine a company's capability to fulfill its short-term liabilities.
Common liquidity ratios include the current ratio, quick ratio, and cash flow ratio. (Brealey,2019)
Two essential ratios for understanding a company's financial status are the profit margin and
return on equity (ROE).
Profit margin is an indicator of the profit a company generates for each dollar of sales. It is
computed by dividing net income by revenue.
Return on equity measures the profit a company generates for each dollar of equity invested in
the company. It is computed by dividing net income by average shareholders' equity.
These two ratios are critical because they offer a comprehensive overview of a company's
profitability and the efficiency of its use of shareholders' equity.
Example of Financial Analysis
We'll use the profit margin and ROE ratios to evaluate the financial status of two publicly traded
US companies listed on the NASDAQ stock market: Apple Inc. and Amazon.com Inc.
Apple Inc.
Ratio 2022 2021 2020
Profit margin 25.20% 25.90% 25.80%
Return on equity 102.80% 110.30% 97.70%

Amazon.com Inc.

Ratio 2022 2021 2020

Profit margin 5.70% 3.30% -0.80%
Return on equity 13.20% 21.00% -32.40%

Analysis:
Apple has a higher profit margin and ROE than Amazon, meaning Apple is more profitable and is
using its shareholders' equity more efficiently.
Amazon's profit margin and ROE have been declining in recent years. This could be due to
various factors, such as increased competition, escalating costs, and investments in new
businesses.
Investors are generally willing to pay a higher price for shares of companies with higher profit
margins and ROEs. This is because these companies are more likely to be profitable in the future
and generate good returns for shareholders.
Apple's higher profit margin and ROE suggest that investors are more optimistic about its future
prospects than Amazon's. This is reflected in the two companies' stock prices. As of September
17, 2023, Apple's stock price is $182.63 per share, while Amazon's stock price is $129.85 per
share.
Article related to doing business in Saudi Arabia
Title: The Investment Landscape in Saudi Arabia: Opportunities and Challenges. (Harvard
Business Review, 2023)
Summary:
This article discusses the investment landscape in Saudi Arabia, highlighting the opportunities
and challenges for businesses. The article notes that Saudi Arabia is undergoing rapid economic
transformation, and that the government is investing heavily in new industries such as tourism,
technology, and renewable energy.
The article also discusses some of the challenges that businesses face in Saudi Arabia, such as
bureaucratic red tape and a shortage of skilled labor. However, the article argues that these
challenges are outweighed by the opportunities that Saudi Arabia offers to businesses. The
article provides valuable insights for businesses that are considering investing.
References:
Warren, C. H., Reeve, J. M., & Duchac, J. J. (2022). Financial accounting and reporting (17th ed.).
Cengage Learning.
Brealey, R. A., Myers, S. C., & Allen, F. (2019). Principles of corporate finance (14th ed.).
McGraw-Hill Education.
Harvard Business Review (2023, March 23). The investment landscape in Saudi Arabia:
Opportunities and challenges.