Financial Statement Analysis is the process of understanding and recognizing the financial strengths and weaknesses of a company by a complete and detailed analysis of the financial information and figures reflected through the annual and quarterly reports of the company. Various techniques are used for the financial analyses which are schedule of changes in working capital, fund analysis, trend analysis, common size percentages, comparative statements and ratio analysis.
The objective behind the preparation of financial statements is to meet the obligation for internal and external reporting and for the decision making requirements. To get the financial statement in use for making decisions they are thoroughly analyzed and interpreted.
Sample Financial Statement Analysis
Name of the Company: Mercantile Plus
Year of analyzes: 2011-2012
Name of financial manager: Mr. John Lewis
Date of preparation: 12 April 2012
The following are the interpretations of the financial statement of the company.
- We see that there are no great fluctuations in gross profits ratio which show the stability of the company on one hand as massive fluctuations in the gross profit is not considered good .The company should try to achieve better results by increasing the sales revenue and controlling the cost of goods sold.
- We see that overall there is an increase in the operating profit margin ratio over years which again adds to the profitability of the company.
- Return on capital employed ratio is declining which is not a good sign for the business as the return to the shareholders is decreasing which in turn would affect the credit standing of the company.
- The asset turnover ratio shows that the company is acquiring new assets over the period time and is expanding its operations but this is not the case with the company. It means that the firm is not able to make efficient use of its assets.
- The current ratio is almost same over years which is just on margin as the ratios below 1 are considered as a bad sign for the firm, so the managers should take the necessary steps to improve this vary ratio.