Summary Knowledge clip - financial ratio analysis introduction (Operational Management)

Knowledge clip financial ratio analysis introduction

Why?
Companies search for finance from e.g.:
 Private investors (venture capitalists)
 Bank
 Owner/ shareholders
 Suppliers/ creditors
All will want to make a judgement on a company’s ability to repay any debts/ loans. Therefore, if you
ask for a loan, then the first question is when do you pay it back and when for example you earn
enough money to pay me back?

Can they base this on trust?
They can but it would be better if it can be based on facts and figures. So they will try to find
information from you company and see if your company is doing well financially and if they will
invest money in your company.

Make a judgement
 How is your company performing?
o Compared to previous years? Performance year on year (or quarter on quarter).
o Compared to other companies/ competitors? (Benchmarking)
 Is your company achieving the goals set? (planned performance)
 Is your company able to pay back long term and short term debts?
If you already have long term loans, would I be willing to invest?
So the ratio analysis helps ‘us’ to understand the financial statement and make management
decisisons.