As you will read, ratio analysis is a financial analysis tool that helps to evaluate a company’s financial performance by comparing various financial ratios. Ratio analysis involves comparing different financial ratios derived from the company’s financial statements to analyze its financial health and performance. Ratio analysis provides insights into a company’s financial performance and can be used by investors, lenders, and other stakeholders to evaluate a company’s financial health. However, it’s important to understand that ratio analysis is not a stand-alone analysis tool, and it needs to be used in conjunction with other analysis tools and methods to gain a comprehensive understanding of a company’s financial performance.
Part A: Conduct additional research (using the NLU library) and respond to the following discussion prompts. In your answer be sure to draw on your research, and all relevant readings and videos in this week’s materials. Also, be sure to provide examples to support your answers.
Clearly define, in your own words the 4 different types of ratios and what each type of ratio measures. Pick one ratio from each of the 4 types and provide your interpretation of that ratio and what story it tells you. Provide some examples to support your response.
Explain the use of industry ratio standards in the interpretation of the financial performance of a firm. Provide some examples. Why are industry ratios important to include in your analysis?
How can organizations use ratio analysis to improve their financial performance?
What are the limitations of ratio analysis? Provide details to support your response here.
Part B: Just as for-profit firms use ratio analysis to indicate financial performance, non-profits firms can also use ratio analysis. Respond to the following with regards to non-profit firms and their use of ratios.
For non-profit firms, are there some ratios that are more appropriate to look at to determine the financial health of the firm? What are they? Show some examples to support your work.
What are some of the limitations and challenges of using these ratios in a non-profit context?
How can non-profit organizations compare their financial performance to other organizations in their industry or sector using ratio analysis?
How can ratio analysis help non-profit organizations make better decisions about budgeting and resource allocation?
How can non-profit organizations use ratio analysis to communicate their financial performance to stakeholders, such as donors and board members.
