Professional Documents
Culture Documents
Basics of Analysis
Basics of Analysis
Basics of Analysis
Ratio Analysis
• Liquidity
– Measures a firm’s ability to meet its current obligations
• Leverage (borrowing capacity)
– Measures the degree of protector for long-term creditors
• Profitability
– Measures the earning ability of a firm
• Cash flow
– Indicate liquidity, borrowing capacity, and profitability
Ratio Analysis
• Guidelines:
– When an item has value in the base year and none
in the next period, the decrease is 100%
– A meaningful percent change cannot be computed
when one number is positive and the other number
is negative
– A percent change is incomputable when there is no
figure for the base year.
Industry Variations
• Common types
– Trend analysis
– SIC: Standard Industrial Classification
– NAICS: North American Industry Classification
System
– Industry averages; competitor comparisons
Comparisons: Trend Analysis
• Management
– Analyze information from the perspective of both
investors and creditors
• Investors
– Analysis of past and present information to project
the future prospects of the entity
• Creditors
– Short-term: focus is on current resources
– Long-term: consider the future prospects of the firm