# (Answered) Financial Ratios and Financial Analysis

## (Answered) Financial Ratios and Financial Analysis

(Answered) Financial Ratios and Financial Analysis 150 150 Prisc

### Financial Ratios and Financial Analysis

Topic: Discuss the purpose and importance of financial ratios and financial analysis. What are the limitations of financial ratio analysis? If we divided the users of financial ratios, such as short-term lenders, long-term lenders, and stockholders, which ratios would each prefer and why? Provide examples.

The writing assignment will demonstrate writing across the curriculum by responding to the following topic in a 750 – 1250 words (3 – 5 pages of content/body) paper. Your paper must integrate at least three external references. Your paper must be formatted according to APA 7th edition.

Financial Ratios and Financial Analysis

Financial ratios are arithmetic tools used to analyze and compare financial relationships between items on income statements, balance sheets, and cash flow statements. On the other hand, financial analysis involves the use of data generated from the financial ratios to develop helpful insights into a company’s productivity, solvency, effectiveness, liquidity, and coverage (Ullah, 2021). There are different types of financial ratios utilized in financial analysis. They include working capital ratio and cash ratio, which provide valuable insights regarding a company’s liquidity or the ability of the company to acheive its current debt obligations using its existing assets (Ullah, 2021). This essay discusses the purpose, importance, and limitations of financial ratios and financial analysis.

Financial ratios and financial analysis are done for various specific purposes. One of them is to extract information about its performance from its financial statements (Nadar & Wadhwa, 2019). Secondly, financial ratios and financial analysis guide entrepreneurs when developing business plans and making presentations for creditors and investors. The information generated from the financial ratio analysis help entrepreneurs to set time-bound performance goals in terms. Also, the information obtained from the financial analysis is crucial for implementing strategic change within an organization (Nadar & Wadhwa, 2019). Thirdly, a firm conducts a financial analysis to identify the strengths and weaknesses of a company. This information is crucial for investors since it allows them to determine the relative strength of companies, regarding its capacity to invest. Fourthly, financial ratio analysis is also done to reveal trends in particular industries. This information helps entrepreneurs or company management measure a company’s performance against all industry players (Nadar & Wadhwa, 2019). Lastly, financial ratios and financial analysis provide crucial data for comparison against firms and their specific industries. Financial ratios position all organizations on a relatively equal playing ground. Thus, financial ratios serve as standardized approach used to compare firms and industries.