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It is performed by professionals who prepare reports using ratios that make use of information taken from Financial Statements and other reports. These reports are usually presented to top management as one of their basis in making business decisions. Based on these reports, management may:
GOALS Financial analysts often assess the firm's: 1. Profitability- its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the Income Statement , which reports on the company's results of operations; 2. Solvency- its ability to pay its obligation to creditors and other third parties in the long-term; 3. Liquidity- its ability to maintain positive Cash Flow , while satisfying immediate obligations; ''Both 2 and 3 are based on the company's Balance Sheet , which indicates the financial condition of a business as of a given point in time.'' 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. METHODS Financial analysts often compare ''' Financial Ratios ''' (of Solvency , Profitability , growth...):
These ratios are calculated by dividing a (group of) account balance(s), taken from the Balance Sheet and / or the Income Statement , by another, for example : :''Net profit / equity = return on equity :'' Gross Profit / balance sheet total = return on assets :''Stock price / earnings per share = P/E-ratio Comparing financial ratios are merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:
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Ratios NOTES EXTERNAL LINKS |
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