THE CRITICAL EVALUATION OF THE USES F FINANCIAL RATIONS IN FINANCIAL STATEMENT ANALYSIS. A RESEARCH PROJECT MATERIAL ON ACCOUNTING
Financial ratios provide managers with insights into the existing strengths and weakness and equally disclose warning indicators of impending failures. Mangers primary objective now is to plan against the flows and improve for the future prospect of the enterprises. There are many aids to intelligent analysis of statement but financial ratio is an important analytical procedure at the mangers disposal in the bid for planning financial ratios are wildly used as a basis for predication especially in the aspects of solvency determination and profitability evaluation. Above all, financial analysts want to assess future earning and dividend paying prospects. If analysts are investigating senior securities they are concerned with the adequacy with which earning cover, interest payment and related annual cash requirement short-term creditors are less interested in long –run earning powers. Their concern is to know the urgent out look of smooth payment and earnings per-share seems to be the single number that get wide attention as a measure of company performance.
1.1 BACKGROUND OF THE STUDY
Financial statement is one of the most important documents used by the management of a firm in making decisions. It shows vividly the strengths and weakness of the firm, which in the process helps management to appraise the past performance of the firm and project into the future.
Financial Ratio analysis employs basic financial data taken form the analysis of financial statements (Balance sheet and income statements) which is the primary financial report of mechanism of an entity both internally and externally. An analysis of the financial information communication by the statement should include the computation and interpretation of financial ratios. Although emphasis is focused on outside users such as creditors and owners management is aware that their performance will be reviewed by these external parties and for other reasons. For example, the basic financial statements are used to assess the effectiveness of management in planning and controlling operations as well as for decision making. Management also recognizes that the evaluation of past operations as reveled by the analysis of the basic. Statement represents a good staring point in planning future operations and serves as an important means of assessing past performance and in forecasting and planning future performance. Published financial statement are properly oriented towards the long-term investor, who is mainly interested in long-term earning power.
Short-term ability of their firm to satisfy its obligation as they fall due. The amount of information an analyst seeks depends on the size of the investment he is considering and on his general familiarity with the springboard for their view. He uses financial history to help him obtain dues as to future performance.