What information does ratio analysis provide for meeting the requirements of the scenario?

Using Ratios To Measure A Companys Performance
What information does ratio analysis provide for meeting the requirements of the scenario?
Potential investors want to understand how companies make decisions and how they make money. By comparing percentages from one time frame to another, the change either positively or negatively, can affect the decision to invest in a company. Ratios can show trends as well as identify areas that need attention or improvement. These comparisons can also look at a company position in a specific industry to identify leaders and overall trends for a particular market
Which ratios are the most important, and which ones are of limited value? Justify your choices for the scenario.
Capital to assets ratio are used to determine the financial health of a company. While assets include what the company owns, capital relates to the value of a company. Brand strength, number of customers, and percentage of market share all contribute to company value.
Management efficiency ratio measure changes in accounts receivables, operating expenses, inventory process, and how a company uses both long term and short term assets.
Leverage ratio analyzes how much debt a company has. Debt to equity can be significant if a company goes belly up and leaves nothing for stockholders.
Liquidity ratios are important, and significant for investment decisions. In manufacturing, there is a period of research, development and production that leads to sale of goods. A company without cash reserves, or disparities on the balance sheet to meet regular obligations can be easily identified with the calculations for current ratio (current assets/current liabilities), quick ratio (cash + accounts receivable/current liabilities) and cash ratio (cash/current liabilities).
Compnet has not paid dividends to investors and this is definitely a ratio to consider in determining the financial health and strength of a company. Ratios that would be less significant for this scenario would be price earnings and dividend payout ratios.
Why do you need to compare?
The current year ratios with the prior year ratios?
Ratios should be compared regularly, such as quarterly, annual or fiscal year end. This can identify trends, efficiencies and weakness of a company.
The ratios of competitors in the same industry or some other benchmark?
Benchmarking is an important tool for management to establish industry standards. It drives completion, innovation and development in operations, production and marketing.
Other than the computations used in ratio analysis, what else is necessary to properly analyze a company for investment?
Financial statements showing cash flow, assets, operating cost and revenues provide the information for ratio comparisons. Investors should consider a companys rank among its industry, management and leadership, supply and demand of product or service
Collier, P. M. (2012). Interpreting Financial Statements. In P. M. Collier, Accounting For Managers (pp. 111-151). West Sussex: John Wiley & Sons Ltd.
Shay, R. (1995). Financial ratio analysis: Why? Savings & Community Banker, 4(1), 40. Retrieved from http://search.proquest.com/docview/195160964?accountid=34899

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