What information does ratio analysis provide for meeting the requirements of the scenario?

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.

In this assignment, you will determine the specific ratios used to measure a company’s performance, using the example of Compnet International. Do not compute any actual ratios as this will be completed in Module 3.

Note: You will apply your learning from this assignment to calculate these ratios for Compnet in the M3: Assignment 2.

Tasks:

Consider the following scenario for this assignment: You are an external investor who is considering Compnet as one of the potential companies for investment.

Referencing the list of ratios from your assigned readings for this week, respond to the following:

  1. What information does ratio analysis provide for meeting the requirements of the scenario?
  2. Which ratios are the most important, and which ones are of limited value? Justify your choices for the scenario.
  3. 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?
  4. Other than the computations used in ratio analysis, what else is necessary to properly analyze a company for investment?

 

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