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NORTHCENTRAL UNIVERSITY

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Learner: Ngoc Le Bao Tran

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BUS4003 Candace Karsjens

Money, Banking and Business Finance Activity7

Faculty Use Only

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Ngoc Le Bao Tran

Northcentral University

Activity 7

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Paper - Financial Analysis

It is common knowledge that the financial analysis is very important for everyone,

especially for business people since they have to understand and apply the information from

the analysis to the business fact so that they can get profit and stay away from business risks

easier. The financial analysis supplies the relative measures of the organizations conditions

and performance. One good financial analysis can be in form of horizontal or verticalanalysis. The horizontal analysis is very useful in evaluating the trend in the accounts over

the year while the vertical analysis is used for disclosing the internal structure of the

organization. The further study about the important elements in one financial analysis is very

important.

First of all, people should pay much attention to the types of ratios. In financial pect,

they are the financial techniques that involve dividing many financial statement number into

one another (Melicher & Norton, 2008). They are very useful in analyzing a firms financial

performance. The performance is based on its income statements and balance sheets. There

are five types of ratio: liquidity, asset management, financial leverage, profitability and

market value ratios. Among them, the first four ones have relation to the information from the

income statements and balance sheet of the company while the last one has relation to thestock market information from the financial statement items (Melicher & Norton, 2008). The

first type, liquidity ratios, refers to the ability of the company to meet the due short-term

obligations (Melicher & Norton, 2008). The asset management ratios indicate the extent to

which the assets of the firm are turned over or used to support the sales (Melicher & Norton,

2008). The third one is the financial leverage ratios. This type mentions about the extent to

which the borrowed or debt funds are used to the financial assets and the ability of the firm to

meet the debt payment obligations (Melicher & Norton, 2008). The profitability ratios relates

to the ability of the company in generating returns on its sales, assets and equity (Melicher &

Norton, 2008). The last one, the market value ratios, indicates the investors willingness to

value the company in the marketplace relative to the financial statement values (Melicher &

Norton, 2008).

The second financial issue for business people to care about is the Du Pont method of

system of ration analysis. This method allows the business firm to generate a return on its

assets because the method helps business firm offer low price and the low profit margins

when it is searching for the high sales volumes on its products or it can help the firm sells

high quality or special products at high prices and rely on the high profit margins to generate

the returns in low sales (Melicher & Norton, 2008). Since the Du Pont method has relation to

both the return on total assets and the return on total equity, it can be used to analyze the

current situations of assets and equity of the firm. The return on total assets is very useful in

examination the relationship