Financial Statement Analysis - Other Issues in Financial Statement Analysis
3 important questions on Financial Statement Analysis - Other Issues in Financial Statement Analysis
What are limitations of ratio analysis? Name three.
- A sudden drop in any ratio may signal that something is wrong, but that doesn't identify the problem.
- Legislation, international affairs, scandals and other factors can turn profits into losses. To be useful, ratios should be analyzed over a period of years to consider all relevant factors. Any one year, or even two years, may not represent the company's performance over the long term.
- The numbers on the financial statement are a result of the company's application of accounting standards that require significant judgment and often rely on estimates and assumptions.
What is Cost of Capital?
Cost of Capital is a weighted average of the returns demanded by the company's shareholders and lenders.
Which conditions may mean a company is very risky? Name six.
- Earnings problems
- Decreased cash flow
- Too much debt
- Inability to collect receivables
- Buildup of inventories
- Trend of sales, inventory and receivables
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