Ratio analysis is a method used to analyze the financial reports of a company and interpret trends in the company’s performance. As a nonaccounting manager, you use numerous ratios to analyze your company’s performance year-by-year and benchmark the performance to industry averages, to an individual competitor’s performance, or against a predetermined target.
For this assignment, read “Case study question 7.2: General Machinery Ltd” on page 168 in chapter 7 of our textbook, Accounting for Managers: Interpreting Accounting Information for Decision Making. Using the data from the case study, repond to the tasks below.
Consider the following scenario for this assignment: You are an external investor who is considering General Machinery as one of the potential companies for investment. Respond to the following in your initial discussion post:
- Discuss the major issues facing the company.
- Recommend what actions the company should take to improve its overall performance, addressing each of profitability, liquidity, gearing, activity, and shareholder return measures.
- In what way does the Statement of Cash Flows help you to interpret the ratios and financial performance of the company?
- What information does ratio analysis provide for meeting the requirements of the case questions?
- Which ratios are the most important, and which ones are of limited value? Justify your choices for the scenario.
- Why do you need to compare:
- The current year ratios with the prior year ratios?
- The ratios of competitors in the same industry or some other benchmark?
- Other than the computations used in ratio analysis, what else is necessary to properly analyze a company for investment?