WEEK 2 ASSIGNMENT 2 Submitted by: David Costa

THE POWER OF FINANCIAL

STATEMENT ANALYSIS
Financial statement analysis is one of the powerful tool for
assessing the health and profitability of a business.
It determines if the business is growing by analysing
revenue and spending patterns and trends.
Identifies the areas that are most important to development
overall.
LIQUIDITY RATIOS
Liquidity ratios are essential to a business's existence since they evaluate its
capacity to pay short-term debts and maintain operations.
Current Ratio is calculated as follows:
Current Ratio: Current Assets / Current Liabilities.
A ratio higher than one implies that the business is able to pay off short-term
obligations since it has more assets than liabilities. For daily operations and
to avoid financial difficulty, this is essential.
LEVERAGE RATIOS
The capacity of a company to satisfy long-term commitments and the degree of
financial risk it faces are both determined by leverage ratios, which are essential to
its survival.

Example: Debt-to-Equity Ratio

The debt-to-equity ratio is calculated as follows:

debt-to-equity ratio = total debt / shareholders' equity.
A larger ratio can indicate a higher degree of financial risk, thus it's critical for a
business to efficiently manage its debt levels to prevent possible bankruptcy.
PROFITABILITY RATIOS
A company's longevity depends on its profitability ratios since they
gauge its capacity to turn a profit, which promotes sustainability and
expansion.
Example: Return on Equity (ROE)
Calculation: ROE = Net Income / Shareholders' Equity.
A greater ROE suggests that equity capital was used efficiently,
indicating that the business can provide returns for shareholders and
maintain long-term survival.
CASH FLOW RATIOS
A company's capacity to create and manage cash flow, which is necessary for paying
bills and averting liquidity problems, is evaluated by cash flow ratios, which are vital
to its existence.
Operating Cash Flow Ratio is one example.
Operating Cash Flow Ratio is calculated as
Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities.
A ratio greater than one means that the business has enough operational cash flow to
pay for its short-term debt, which guarantees that it will have enough money to
continue functioning.
HOW THESE RATIOS AFFECT
COMPANY’S FINANCIAL HEALTH
Holistic View: A company's financial health may be fully understood by examining
its liquidity, leverage, profitability, and cash flow statistics taken together.
Operational Continuity: The company's ability to satisfy short-term commitments
is guaranteed by liquidity ratios like the current ratio, which protects day-to-day
operations.
Risk mitigation: Leverage ratios, such as debt-to-equity, draw attention to the
financial risk that the business faces and underscore the need of efficient debt
management in order to prevent bankruptcy.
HOW THESE RATIOS AFFECT
COMPANY’S FINANCIAL HEALTH

Sustainability and Growth: The capacity of the business to earn a profit is

shown by profitability measures like Return on Equity, which promote long-
term sustainability and growth.
Cash Flow Management: By ensuring the business can produce enough
cash to pay its commitments, cash flow ratios—such as the operating cash
flow ratio—avoid liquidity problems.
CONCLUSION
Financial analysis statements serves as a company's survival
compass.
Leverage ratios highlight financial dangers, whereas liquidity
ratios guarantee operational flexibility.
Cash flow ratios provide liquidity, while profitability ratios
support sustainability.
When combined, they strengthen strategic decision-making and
provide a way towards growth and financial resilience.
REFERENCES
Gibson, C. H. (2012). Financial reporting and analysis. Cengage Learning.
Xolmirzaev, U. A. (2020). Financial assets and improvements of their
analysis. Экономика и социум, (1 (68)), 102-105.
https://corporatefinanceinstitute.com/resources/accounting/profitability-ratios/