Financial ratio is analyzed on the basis of the financial report. The sources of the ratio are the balance sheet, income statement, statement of retained earnings and cash flow statement.
Ratio analysis is one of the key components of the financial statement, because a smart businessman should control and record the process of the work and development and profit and expenditures of his company. On the basis of the records of the financial statement it is possible to analyze ratio of the company in different periods. More often, the numbers of the ratio of the several years are analyzed. On the other hand, small firms calculate ratio every half of the year to find out whether their business is profitable and whether they need to make any changes and improvements.
Ratio analysis is also based on the performance of other companies, so that the profit and success of the firm is compared to the other firms which work in the same sector of the market. Moreover, ration analysis is calculated on the basis on the global economic processes, for example, companies calculate their performance comparing it to all the companies in the world on the basis of the harmful impact of the global financial crisis, depression, etc. Ratio analysis not only shows the current financial condition of a company, but also serves as reliable evidence for the financial managers (who evaluate the condition of the company after the introduction of the certain innovations), creditors and investors (who judge whether the company is reliable enough to be trusted and whether it is worth the invested money).
Ratio analysis is an important factor of the successful work of business, so students who are going to become involved in this process should be aware of all the slightest points of the topic. If a student is seriously interested in the problem of ratio analysis and wants to introduce some new ideas which can be helpful for the discipline, he can try to prepare a research paper on it. In fact, he should complete an informative and interesting convincing research proposal about the problem. A successful paper is expected to possess the purpose of the research, the used methods, the literature review and the list of the expected results.
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