Chapter 6: Financial Ratio Analysis
This chapter attempts to show a simplified route through the use of financial ratios. By explaining the development and use of the most important ratios, and the form which they are likely to be presented, you will be equipped with the skill necessary to take a critical view of an important area of company performance measurement.
The discussion of ratio analysis is not restricted to analysing profitability. I will present other important areas of ratio analysis such as liquidity, financial structure (gearing), employee and investment ratios.
A fully worked example will be used throughout this chapter.
Chapter 7: Company Financial Analysis
Describes research by academics which has revealed that statistical and non-statistical approaches can be used for analysing financial and non-financial data in order to form a view about corporate financial health.
In this chapter I will describe a non-financial approach by Argenti, a statistical approach by Altman and a hybrid systems approach by Robertson. A worked example of each approach will be included.
A substantial portion of this chapter is devoted to "Working with published accounts" using a case study given in Appendix A. Here I will introduce a Diary of events, Common size statement, Cost Analysis statement then extend the discussion/comparison of various forms of financial ratios and conclude with recognising the importance of non-financial indicators.
The Author:
John Robertson, Dip ML (Lancaster), Phd. (Brunel), now retired, was Head of the Defence Management Group and Deputy Head of the Department of Defence Management and Security Analysis at Cranfield University, Shrivenham Campus.
He taught accounting and finance to 2nd and 3rd year undergraduates following degrees in Engineering, Computing and Logistics, also full and part time Masters programmes in Defence Administration (MDA).
He gave regular guest lectures in a number of Universities.
A Fellow of the Chartered Institute of Management Accountants (FCMA)., and author of numerous articles on financial ratios and ratio models. Author of “Accounting Principles for Non-Accounting Students” 2nd edition; a research monograph, “Measuring Changes in Financial Health through Ratio Analysis”. Co-author of “Fundamentals of Managerial Accounting and Finance” 4th edition.
This chapter attempts to show a simplified route through the use of financial ratios. By explaining the development and use of the most important ratios, and the form which they are likely to be presented, you will be equipped with the skill necessary to take a critical view of an important area of company performance measurement.
The discussion of ratio analysis is not restricted to analysing profitability. I will present other important areas of ratio analysis such as liquidity, financial structure (gearing), employee and investment ratios.
A fully worked example will be used throughout this chapter.
Chapter 7: Company Financial Analysis
Describes research by academics which has revealed that statistical and non-statistical approaches can be used for analysing financial and non-financial data in order to form a view about corporate financial health.
In this chapter I will describe a non-financial approach by Argenti, a statistical approach by Altman and a hybrid systems approach by Robertson. A worked example of each approach will be included.
A substantial portion of this chapter is devoted to "Working with published accounts" using a case study given in Appendix A. Here I will introduce a Diary of events, Common size statement, Cost Analysis statement then extend the discussion/comparison of various forms of financial ratios and conclude with recognising the importance of non-financial indicators.
The Author:
John Robertson, Dip ML (Lancaster), Phd. (Brunel), now retired, was Head of the Defence Management Group and Deputy Head of the Department of Defence Management and Security Analysis at Cranfield University, Shrivenham Campus.
He taught accounting and finance to 2nd and 3rd year undergraduates following degrees in Engineering, Computing and Logistics, also full and part time Masters programmes in Defence Administration (MDA).
He gave regular guest lectures in a number of Universities.
A Fellow of the Chartered Institute of Management Accountants (FCMA)., and author of numerous articles on financial ratios and ratio models. Author of “Accounting Principles for Non-Accounting Students” 2nd edition; a research monograph, “Measuring Changes in Financial Health through Ratio Analysis”. Co-author of “Fundamentals of Managerial Accounting and Finance” 4th edition.
