Financial Ratio Analysis - Essay Example

Financial ratio analysis, simply ratio analysis, is the data contained in the company’s financial statement. The analysis is solely based on the balance sheet, cash flow statement, and income statement. From such parameters of the company, it is possible to evaluate the company’s performance regarding efficiency, the possibility of liquidity, profitability, and solvency of the company. In the end, such ratios will give a trend of the company whether it is improving or deteriorating.

Comparison of these ratios with other companies will give a hand in comparative valuations. The financial ratio has its advantages to the company and the customers in equal or less gravity. In an article on transoceanic financial ratio analysis, it is easy for the customer to look at how the stocks look like. Customers will find it easy to evaluate the company-using price to earnings ratio. Such metric valuation uses the wisdom that nonoperational aspects of the company such as asset impairment can affect earnings per share (Xiao, 2014).

With this valuation, the company and customer can make advised decisions while investing or rectifying the areas of problem. Financial ratio analysis is also advantageous in that it is easy to come up with the components of returns. Such returns include pre-taxed interest and the pre-taxed margin. The two are the core profitability of the company before interest and taxes. The higher margins show better prospects for the company. Another component of return is asset turnover. Asset turnover is the revenue generated for the expenses of the assets (Xiao, 2014).

The Transoceanic financial ratio analysis article has a higher number indicating it is efficient in using its assets. On the disadvantages side, financial ratio analysis has a couple of demerits. First and foremost, the financial ratio analysis cannot be used singularly or standalone method. They must be used hand in hand with an aggregate economy. The full economic cycle must be factored in, during analysis. Secondly, inflation can badly bloat the company’s balance sheet.