- D076 UNIT 4 Finance Skills for Managers QUIZ

Ratios are useful for analyzing and comparing company performance for at least four different reasons: - Standardization Flexibility Focus Evaluation You can standardize the companies' net incomes by - dividing both by the total sales of those companies. This will help you to see how much income in percentage terms was earned from the total sales made during the year. Standardization - ratios standardize financial data, thus making it comparable across firms—even those of distinctly different sizes. Flexibility - you can create new ratios to meet your needs Evaluation - whether the firm is achieving its stated goal to maximize shareholder wealth Focus - help you know what to focus on and help you evaluate the performance of a firm benchmarking - The process of completing a financial analysis and comparing a firm's performance to that of other similar firms There are three main comparison methods used in ratio analysis: - trend analysis, cross-sectional analysis, and progress measurement.These methods help you use ratios to analyze the financial performance of a business. trend analysis - looks at a firm's financial ratios over time Trend analysis time series generally look backward.... - five years and forecast forward three years total asset turnover - It calculates how well a firm is using its assets to generate sales, which you will define as sales over total assets cross-sectional analysis - compares a firm's financial ratios with those of a peer res the firm to a cross-section of its peers, its competitors, its industry, or even the market in general and tells the analyst something about the target firm's relative strength (or weakness) and performance progress and achieve goals - is critical for firms to stay competitive in today's global market. Remember what the old proverb says: "Where there is no vision, the people perish." There are two types of firms in which data timing could be problematic: - seasonal firms and high- growth firms. Seasonal firms - those that have high sales during one part of the year and low sales during another part of the year. Ratios themselves are not useful, but through comparisons such as trend analysis, cross-sectional analysis, and progress measurement, they - become meaningful Which statement below is an example of how ratios are used in the field of finance? - A firm's ratios are compared with those of a benchmark peer group to determine the firm's relative strength and performance. Why are ratios considered flexible? - Because they are not regulated and can be changed or invented according to a firm's needs