Exemplary Common Ratio Analysis
Common size analysis can be conducted in two ways ie vertical analysis and horizontal analysis.
Common ratio analysis. Current Ratio The current ratio is a liquidity ratio which estimates the ability of a company to pay back short-term obligations. Ratio analysis is a quantitative method of gaining insight into a companys liquidity operational efficiency and profitability by studying its financial statements such as the balance sheet and. Since there are many ratios it becomes easy to categorize them under broad categories.
An analyst uses a combination of these ratios to analyze various aspects of a business. Ratio analysis is used to evaluate relationships among financial statement items. They can also be used to compare different companies in different industries.
Financial analysts use many ratios while analyzing a company. Vertical analysis refers to the analysis of specific line items in relation to a base item within the same financial period. Ratios are easy to understand and simple to compute.
The following table lists the categories and the key ratios within each category. A common size balance sheetmakes every account on the balance sheet a percent of total assets. Common-Size Ratio Analysis Common-size ratio analysis can provide further time series evidence on Zeos financial performance for years 2009 and 2010.
A higher current ratio indicates the higher capability of a company to pay back its debts. The ratios are used to identify trends over time for one company or to compare two or more companies at one point in time. This ratio is also known as cash asset ratio cash ratio and liquidity ratio.
Financial ratios are the most common and widespread tools used to analyze a business financial standing. Common size or vertical analysis is a method of evaluating financial information by expressing each item in a financial statement as a percentage of a. In the examination you will be asked to calculate and interpret the ratios used in analytical procedures at the audit planning stage and when collecting audit evidence.