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                            FINANCIAL  ANALYSIS
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Page 20

• Comparative Performance - Comparison between similar firms.

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 income / equity = return on equity (ROE)

Net income / total assets = return on assets (ROA)

Stock price / earnings per share = P/E ratio

Comparing financial ratios is merely one way of conducting financial

analysis. Financial ratios face several theoretical challenges:

• They say little about the firm's prospects in an absolute sense. Their

insights about relative performance require a reference point from

other time periods or similar firms.

• One ratio holds little meaning. As indicators, ratios can be logically

interpreted in at least two ways. One can partially overcome this

problem by combining several related ratios to paint a more

comprehensive picture of the firm's performance.

• Seasonal factors may prevent year-end values from being

representative. A ratio's values may be distorted as account balances

change from the beginning to the end of an accounting period. Use

average values for such accounts whenever possible.

• Financial ratios are no more objective than the accounting methods

employed. Changes in accounting policies or choices can yield

drastically different ratio values.

• They fail to account for exogenous factors like investor behavior that

are not based upon economic fundamentals of the firm or the general

economy (fundamental analysis) .

http://en.wikipedia.org/wiki/Fundamental_analysis
http://en.wikipedia.org/wiki/Financial_ratios
http://en.wikipedia.org/wiki/P/E_ratio
http://en.wikipedia.org/wiki/Return_on_assets
http://en.wikipedia.org/wiki/Net_income
http://en.wikipedia.org/wiki/Return_on_equity
http://en.wikipedia.org/wiki/Net_income
http://en.wikipedia.org/wiki/Income_statement
http://en.wikipedia.org/wiki/Balance_sheet

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