Financial Statement Analysis

Meaning
The process of reviewing, simplifying, and interpreting a company’s financial
statements to make better economic decisions is called analysis of financial statements. In
other words, the process of determining the financial strengths and weaknesses of the
entity by establishing the strategic relationship between the items of the balance
sheet, profit and loss account, and other financial statements.
The term ‘analysis’ means the simplification of financial data by methodical classification
of the data given in the financial statements, and ‘interpretation’ means, ‘explaining the
meaning and significance of the data so simplified.’ However, both’ analysis
and interpretation’ are interlinked and complementary to each other.

Significance of Financial Analysis

i) For Finance Manager
Analysis of financial statements helps the finance manager in:
 Assessing the operational efficiency and managerial effectiveness of the
company.
 Analyzing the financial strengths and weaknesses and creditworthiness of
the company.
 Analyzing the current position of financial analysis,
 Assessing the types of assets owned by a business enterprise and the liabilities
which are due to the enterprise.
 Providing information about the cash position company is holding and how
much debt the company has in relation to equity.
 Studying the reasonability of stock and debtors held by the company.
ii) To Top Management
Financial analysis helps the top management
 To assess whether the resources of the firm are used in the most efficient
manner
 Whether the financial condition of the firm is sound
 To determine the success of the company’s operations
 Appraising the individual’s performance
 evaluating the system of internal control
 To investigate the future prospects of the enterprise.
iii) To Trade Suppliers
Trade suppliers analyze of financial statements for:
 Appraising the ability of the company to meet its short-term obligations
 Judging the probability of firm’s continued ability to meet all its financial
obligations in the future.
 Firm’s ability to meet claims of creditors over a very short period of time.
 Evaluating the financial position and ability to pay off the concerns.
iv) Lenders
Suppliers of long-term debt are concerned with the firm’s long-term solvency and
survival. They analyze the firm’s financial statements
  To ascertain the profitability of the company over a period of time,
 For determining a company’s ability to generate cash, to pay interest and
repay the principal amount
 To assess the relationship between various sources of funds (i.e. capital
structure relationships)
 To assess financial statements which contain information on past
performances and interpret it as a basis for forecasting future rates of return
and for assessing risk.
 For determining credit risk, deciding the terms and conditions of a loan if
sanctioned, interest rate, and maturity date etc.
v) Investors
Investors, who have invested their money in the firm’s shares, are interested in the firm’s
earnings and future profitability. Financial statement analysis helps them in predicting the
bankruptcy and failure probability of business enterprises. After being aware of the
probable failure, investors can take preventive measures to avoid/minimize losses.
vi) Labour Unions
Labour unions analyze the financial statements:
 To assess whether an enterprise can increase their pay.
 To check whether an enterprise can increase productivity or raise the prices of
products/ services to absorb a wage increase.

Objectives of Financial Analysis

Let us look at some of the main objectives of financial analysis,
1. Reviewing the performance of a company over the past periods: To
predict the future prospects of the company, past performance is analyzed.
Past performance is analyzed by reviewing the trend of past sales,
profitability, cash flows, return on investment, debt-equity structure and
operating expenses, etc.
2. Assessing the current position & operational efficiency: Examining the
current profitability & operational efficiency of the enterprise so that the
financial health of the company can be determined. For long-term decision
making, assets & liabilities of the company are reviewed. Analysis helps in
finding out the earning capacity & operating performance of the company.
3. Predicting growth & profitability prospects: The top management is
concerned with future prospects of the company. Financial analysis helps them
in reviewing the investment alternatives for judging the earning potential of
the enterprise. With the help of financial statement analysis, assessment and
prediction of the bankruptcy and probability of business failure can be done.
4. Loan Decision by Financial Institutions and Banks: Financial analysis
helps the financial institutions, loan agencies & banks to decide whether a loan
can be given to the company or not. It helps them in determining the credit
risk, deciding the terms and conditions of a loan if sanctioned, interest rate,
maturity date etc.
Tools of Financial Analysis
Financial statements are prepared to have complete information regarding assets,
liabilities, equity, reserves, expenses and profit and loss of an enterprise. To analyze &
interpret the financial statements, commonly used tools are comparative statements,
common size statements etc. Let us take a look.
i) Comparative/Horizontal Analysis
a) Year to year: Comparative statements
b) Years: Trend Analysis
ii) Vertical/ Common size Analysis
a) Common Size Income Statement
b) Common size Balance Sheet
iii) Ratio analysis

Comparative Statements
Also known as ‘horizontal analysis, are financial statements showing financial position &
profitability at different periods of time. These statements give an idea of
the enterprise financial position of two or more periods. Comparison of financial
statements is possible only when same accounting principles are used in preparing these
statements.

Comparative Balance Sheet

The progress of the company can be seen by observing the different assets and
liabilities of the firm on different dates to make the comparison of balances from one date
to another. To understand the comparative balance sheet, it must have two columns for the
data of original balance sheets. A third column is used to show increases/decrease in
figures. The fourth column gives percentages of increases or decreases.
Increase/Decrease (in amount) = Latest value- base value
Increase/Decrease in percentage = (change in amount/base value) * 100
Base value = earliest value
By comparing the balance sheets of different dates, one can observe the following aspects
 Current financial position and Liquidity position
 Long-term financial position
Analysis:
As we can see in the comparative balance sheet above, the current assets of Kapoor and
Co. have decreased by Rs 35,200 in the year 2018 over 2017.
On the other hand, the current liabilities have decreased by Rs 27,000 only. Now, such a
change does not have a negative impact on the liquidity position of M/s Kapoor and Co.
This is because current assets have decreased by 33.9% whereas current liabilities have
declined by 51.5%.
Secondly, the cash and bank balance of Kapoor and Co. have decreased by 91.5%. This
indicates a negative cash position of the company. It further hints towards the fact that
the company might find it challenging to meet its short-term obligations.
Next, the long-term debt of M/s Kapoor and Co. has increased by 62.5%. On the other
hand, the owner’s equity has improved by only 34%. This indicates that the company is
way too dependent on the external lenders thus leading to a great financial risk for the
firm.
Finally, there is a considerable increase seen in the fixed assets of the company.
Accordingly, the fixed assets increased by Rs 79,000 or 64.9% from the year 2017 to
2018. This was on account of the huge addition made to the plant and machinery by the
company in the given accounting periods.
Plant and machinery increased by Rs 95,200 that is by 153.5%. Such additional
machinery leads to an incredible improvement in the production capacity of the
company during the year. This expenditure was provided for by the company
proprietors and the external lenders.

Comparative Income Statement

Traditionally known as trading and profit and loss A/c. Net sales, cost of goods sold,
selling expenses, office expenses etc are important components of an income statement.
To compare the profitability, particulars of profit & loss are compared with the
corresponding figures of previous years individually. To analyze the profitability of the
business, the changes in money value and percentage is determined.
By comparing the profits of different dates, one can observe the following aspects:
 The increase/decrease in gross profit.
 The study of operational profits.
 The increase or decrease in net profit
 Study of the overall profitability of the business.

Analysis:

Analysis
As is evident from the above comparative income statement, the sales of M/s Singhania
increased by Rs 20,400 during 2018 as against 2017. However, the cost of goods sold
for the company increased by just Rs 15,000 in the same period. If you see carefully,
sales increased by 12% whereas the cost of goods sold increased by 14.3%. Thus,
the Gross Profit for M/s Singhania did not increase significantly. Now, there can be
several reasons for accounting lower Gross Profit during the year:

Increase In Cost of Goods Sold

Firstly, a higher increase in the cost of goods sold can be on account of either increased
sales volume or higher input cost. Furthermore, it is evident that the cost of goods sold
for the company improved as an outcome of increased sales volume. This is because the
sales increased during the year.

Now, the sales value would have increased significantly if the company would have
made sales at the previous sales price. But that is not the case as sales value did not
change to a greater extent. This hints towards the fact that incremental sales have been
made at a price lower than the sales price.

Furthermore, this analysis is supported by the increase in the advertisement expenses of

the company for the year 2018. These increased by 33% which is much higher as
against the increase in net sales that was just 12%. Thus, this entire scenario indicates
that it was quite challenging to sell the goods during 2018.

Hence, the company increased its advertisement cost significantly and reduced the
selling price in order to achieve higher sales volume. Also, This scenario could be an
outcome of a new product launch. In such a case, the company had to spend a huge
amount on the advertisement and reduce the selling price for market penetration.

Increase In Other Income and Decrease in Other Expenses

There has been a significant increase in “Other Income” both in absolute and relative
terms. Also, there has been a substantial decrease in “Other Expenses” both in absolute
and relative terms. Thus, these items on the income statement lead to an improvement in
the Profit Before Tax for the year 2018 as against 2017. Hence, such a fact indicates that
the company gave more importance to earning non-operating profits over operating one.

Trend analysis or Trend Percentages

Trend percentages are similar to horizontal analysis except that comparisons are made
to a selected base year or period. Trend percentages are useful for comparing financial
statements over several years because they disclose changes and trends occurring
through time.

Trend percentages, also referred to as index numbers, help us to compare financial

information over time to a base year or period. We can calculate trend percentages by:

 Selecting a base year or period.

 Assigning a weight of 100% to the amounts appearing on the base-year financial
statements.
 Expressing the corresponding amounts on the other years’ financial statements as
a percentage of base-year or period amounts. Compute the percentages
 by Analysis year amount / base year amount and then multiplying the result by
100 to get a percentage.

The trend analysis would look like this (calculations added beside each column):

(USD millions) 20Y3 20Y4 20Y5

Net sales $9,105.50 $10,029.80 $10,498.80
10029.8/9105.
9105.50/9105.5
Trend Percent of sales 5
100% 110.15% 115.30%
Cost of goods sold 4,696.00 5,223.70 5,341.30

Trend percent of COGS 100% 111.24% 113.74%

Gross profit $4,409.50 $4,806.10 $5,157.50
Trend percent of Gross
100% 108.99% 116.96%
Profit
Operating expenses 3,353.60 4,369.90 4,012.00

Trend percent of Operating

100.00% 130.30% 119.63%
Expenses

Income before income taxes $1,055.90 $436.20 $1,145.50

Trend Percent of Income

before Taxes 100.00% 41.31% 108.49%

These trend percentages indicate the changes taking place in the organization and
highlight the direction of these changes. For instance, the percentage of sales is
increasing each year compared to the base year. Cost of goods sold increased at a lower
rate than net sales in 20Y3 and 20Y5, causing gross profit to increase at a higher rate
than net sales. Operating expenses in 20Y4 increased due to the provision for
restructured operations, causing a significant decrease in income before income taxes.
Percentages provide clues to an analyst about which items need further investigation or
analysis. In reviewing trend percentages, a financial statement user should pay close
attention to the trends in related items, such as the cost of goods sold in relation to sales.
Trend analysis that shows a constantly declining gross margin (profit) rate may be a
signal that future net income will decrease.

As useful as trend percentages are, they have one drawback. Expressing changes as
percentages is usually straightforward as long as the amount in the base year or period is
positive—that is, not zero or negative. Analysts cannot express a $30,000 increase in
notes receivable as a percentage if the increase is from zero last year to $30,000 this
year (remember, you cannot divide by zero). Nor can they express an increase from a
loss last year of – $10,000 to income this year of $20,000 in a realistic percentage term.

Proper analysis does not stop with the calculation of increases and decreases in amounts
or percentages over several years. Such changes generally indicate areas worthy of
further investigation and are merely clues that may lead to significant findings. Accurate
predictions depend on many factors, including economic and political conditions;
management’s plans regarding new products, plant expansion, and promotional outlays;
and the expected activities of competitors. Considering these factors along with
horizontal analysis, vertical analysis, and trend analysis should provide a reasonable
basis for predicting future performance.

2) Common Size Analysis

Common size analysis, also referred as vertical analysis, is a tool that financial
managers use to analyze financial statements. It evaluates financial statements by
expressing each line item as a percentage of a base amount for that period. The analysis
helps to understand the impact of each item in the financial statements and its
contribution to the resulting figure.
The technique can be used to analyze the three primary financial statements,
i.e., balance sheet, income statement, and cash flow statement. In the balance sheet, the
common base item to which other line items are expressed is total assets, while in the
income statement, it is total revenues.

Formula for Common Size Analysis

Common size financial statement analysis is computed using the following formula:

Types of Common Size Analysis

Common size analysis can be conducted in two ways, i.e., vertical analysis and
horizontal analysis. Vertical analysis refers to the analysis of specific line items in
relation to a base item within the same financial period. For example, in the balance
sheet, we can assess the proportion of inventory by dividing the inventory line using
total assets as the base item.

On the other hand, horizontal analysis refers to the analysis of specific line items and
comparing them to a similar line item in the previous or subsequent financial period.
Although common size analysis is not as detailed as trend analysis using ratios, it does
provide a simple way for financial managers to analyze financial statements.

Balance Sheet Common Size Analysis

The balance sheet common size analysis mostly uses the total assets value as the base
value. A financial manager or investor can use the common size analysis to see how a
firm’s capital structure compares to rivals. They can make important observations by
analyzing specific line items in relation to the total assets.

For example, if the value of long-term debt in relation to the total assets value is high, it
may signal that the company may become distressed.

Let’s take the example of ABC Company, with the following balance sheet:
From the table above, we calculate that cash represents 14.5% of total assets while
inventory represents 12%. In the liabilities section, accounts payable is 15% of total
assets, and so on.

Income Statement Common Size Analysis

The base item in the income statement is usually the total sales or total revenues.
Common size analysis is used to calculate net profit margin, as well as gross and
operating margins. The ratios tell investors and finance managers how the company is
doing in terms of revenues, and can be used to make predictions of future revenues and
expenses. Companies can also use this tool to analyze competitors to know the
proportion of revenues that goes to advertising, research and development, and other
essential expenses.

We can also analyze ABC Company’s income statement:

By looking at this common size income statement, we can see that the company spent
10% of revenues on research and development and 3% on advertising.
Net income represents 10% of total revenues, and this margin can be compared to the
previous year’s margin to see the company’s year-over-year performance.

What are the Benefits of Common Size Analysis?

One of the benefits of using common size analysis is that it allows investors to identify
large changes in a company’s financial statements. It mainly applies when the financials
are compared over a period of two or three years. Any significant movements in the
financials across several years can help investors decide whether to invest in the
company.

For example, large drops in the company’s profits in two or more consecutive years may
indicate that the company is going through financial distress. Similarly, considerable
increases in the value of assets may mean that the company is implementing an
expansion or acquisition strategy, potentially making the company attractive to
investors.

Common size analysis is also an excellent tool to compare companies of different sizes
but in the same industry. Looking at their financial data can reveal their strategy and
their largest expenses that give them a competitive edge over other comparable
companies.

For example, some companies may sacrifice margins to gain a large market share,
which increases revenues at the expense of profit margin. Such a strategy may allow the
company to grow faster than comparable companies.

When comparing any two common size ratios, it is important to make sure that they are
computed by using the same base figure. Failure to do so will render the comparison
meaningless..

Financial Ratio Analysis

What Are Ratios?

Ratios are one of the important tools of financial statement analysis. These showcase a
relationship between two or more accounting numbers that are taken from the financial
statements. Further, such ratios are expressed either as a fraction, percentage, proportion
or number of times.

The accuracy or efficiency of ratios as a financial statement analysis tool rests on the
financial statements. This is because while calculating a particular financial ratio, the
two or more accounting numbers used are taken from such statements. Thus, if the
financial statements contain erroneous data, ratios too would depict a false analysis of
the company’s financial results.
Also, the accounting numbers used to calculate ratios should have some relationship
between them. This is because unrelated numbers would not give any meaningful
analysis of the company’s financial results.

Types/Categories of Ratios
Typically, the accounting ratios are classified based on the purpose for which a
particular ratio is calculated. Accordingly, ratios can be classified into following
categories:

 Liquidity Ratios
 Solvency Ratios
 Activity (Turnover) Ratios
 Profitability Ratios

1. Liquidity Ratios
Liquidity ratio analysis helps in measuring the short-term solvency of a business. That
is, a company’s ability to meet its short-term obligations. Liquidity suggests how
quickly assets of a company get converted into cash. Further, it ensures uninterrupted
flow of cash to meet its current liabilities. Also, liquidity of a company indicates
whether it has sufficient funds to meet its day-to-day business operations.

Types of Liquidity Ratios

i. Current Ratio
Current ratio evaluates a company’s ability to meet its short-term obligations that are
typically due within a year. A current ratio lower than the industry average suggests
higher risk of default on the part of the company. Likewise companies having too high a
current ratio relative to the industry standard suggests that they are using their assets
inefficiently.

Current Ratio = Current Assets/Current Liabilities

ii. Quick Ratio

Quick ratio is a more cautious approach towards understanding the short-term solvency
of a company. It includes only the quick assets which are the more liquid assets of the
company.

Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts

Receivable)/(Current Liabilities)

iii. Cash Ratio

Cash ratio measures company’s total cash and cash equivalents relative to its current
liabilities. Such a ratio indicates the ability of the company to meet its short-term debt
obligations using its most liquid assets.
Cash Ratio = (Cash + Cash Equivalents/Current Liabilities)

iv. Defensive Interval Ratio

This ratio ascertains the time period for which the company can continue to pay off its
expenses. These expenses are paid off from the company’s existing pool of liquid assets
without receiving any additional cash inflow. Therefore, a higher defensive interval
ratio suggests greater liquidity.

Defensive interval ratio (in number of days) = Liquid Current Assets/Daily Operational
Expenses

Liquid Current Assets = Cash + Marketable Securities + Net Receivables

Daily Operational Expenses = (Annual Operating Expenses – Non-Cash Charges)/365

2. Solvency Ratios
The term solvency refers to the ability of the company to meet its long – term debt
obligations. Solvency ratios help in determining the amount of debt used by the
company as against the owner’s fund. Further, these help in ascertaining if the
company’s earnings and cash flows are sufficient to meet interest expenses as they
accrue in future.

Types of Solvency Ratios

i. Debt To Asset Ratio

This ratio measures the amount of debt taken by a business as against the equity. It helps
in determining the financial leverage of the business.

Debt To Asset Ratio = Total Debt/Total Assets

ii. Debt To Capital Ratio

This ratio also helps in measuring the financial leverage of the company. It helps the
investors to have a fair idea about the financial structure of the company. Thus,
investors get an understanding if it is good to invest in a particular company or not. So,
higher debt equity ratio indicates higher risk associated with the company.

Debt to Capital Ratio = Debt(Both Short-Term and Long-Term Debt)/Total Capital

(Debt + Shareholders Equity)

iii. Debt To Equity Ratio

This ratio evaluates the amount of debt capital of the company as against its equity
capital. Higher the ratio, weaker the solvency of a company.

Debt To Equity Ratio Formula = Total Debt/Total Shareholders Equity

iv. Interest Coverage Ratio
Interest Coverage Ratio determines number of times the EBIT (Earnings before interest
and taxes) of a company can cover its interest payments. This ratio thus indicates the
solvency of a firm. Higher the interest coverage ratio, greater is its solvency.

Interest Coverage Ratio = EBIT/Interest Payments

v. Fixed Charge Coverage

This ratio determines number of times earnings (before interest, taxes and lease
payments) of a company are able to cover the interest and the lease payments of the
company. Thus, a higher fixed charge coverage ratio indicates greater solvency
suggesting that the company can pay off its debt from its earnings.

Fixed Charge Coverage Ratio = (EBIT + Lease Payments)/(Interest Payment + Lease

Payment)

3. Activity Ratios

Activity ratios measure the efficiency of a business in using and managing its resources to
generate maximum possible revenue. The different types of activity ratios show the
business’ ability to convert different accounts within the balance sheet such as capital and
assets into cash or sale. These ratios are also known as asset management ratios or
performance/ efficiency ratios.

Activity ratios play an active role in evaluating the operating efficiency of the business as
it not only shows how the company generates revenue but also how well the company is
managing the components in its balance sheet.

Types of Activity Ratios

i. Accounts Receivable Turnover Ratio:

The accounts receivables turnover ratio, also known as debtor’s ratio, is an activity
ratio that measures the efficiency with which the business is utilizing its assets. It measures
how many times a business can turn its accounts receivables into cash. The ratio indicates
the efficiency with which the business is able to collect credit it issues its customers.

While a high ratio may indicate the company operates on a cash basis or has quality
customers that pay off their debts quickly, a low ratio can suggest a bad credit policy and
poor collecting process. It helps in assessing if its credit policies are helping or hurting the
business.

Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable

ii. Working Capital Ratio:

The working capital turnover ratio indicates a business effectiveness in utilizing its
working capital. Working capital is the total amount of current assets minus the current
liabilities.

A high working capital ratio shows that the business is efficiently using its short-term
liabilities and assets for supporting sales. A low ratio could indicate bad debts or obsolete
inventory.

Working Capital Ratio = Net Sales / Working Capital

iii. Asset Turnover Ratio:

The asset turnover ratio measures the efficiency with which a company utilizes its assets to
generate sales. The ratio calculates net sales as a percentage of assets. This ratio is
calculated at the end of a financial year and can vary widely from one industry to another.
The higher the asset turnover ratio, the better the company is performing.

Asset Turnover Ratio = Sales / Average Total Assets

iv. Fixed Asset Turnover Ratio:

This ratio measures the business’ ability to generate sales from fixed assets such as
property, plant and equipment. To calculate the ratio, you need to divide the net sales by
the total property, plant, and equipment net of accumulated depreciation. A high turnover
ratio indicates the assets are being utilized efficiently for generating sales.

Fixed Asset Turnover Ratio = Net Sales / (Fixed Assets – Accumulated Depreciation)

v. Inventory Turnover Ratio:

The inventory turnover ratio details the efficiency with which inventory is managed. The
ratio shows how well the business manages its inventory levels and how frequently they
are replenished. A low inventory turnover ratio may indicate overstocking,
poor marketing or a declining demand for the product. A high ratio is an indicator of good
inventory management and a higher demand for the product.

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

vi. Days Payable Outstanding:

The ratio measures the number of days a business takes to pay its invoices and bills to its
vendors, suppliers or other companies. A low ratio indicates that the business is either not
utilizing its credit period efficiently or has short-term arrangements with creditors.

Days Payable Outstanding = Accounts Payable / (Cost of Sales/ Number of Days).

4. Profitability Ratios
Profitability ratios determine the ability of the company to generate profits as against :
(i) Sales, (ii) Operating Costs, (iii) Assets and (iv) Shareholder’s Equity. This means
such ratios reveal how well a company makes use of its assets to generate profitability
and create value for shareholders.

Types of Profitability Ratios

i. Gross Profit Margin Ratio

Gross Profit Margin measures the Gross Profit against the sales revenue of a business.
This margin reveals the amount of earnings that a company is generating after
considering the costs incurred to produce goods and services.

Gross Profit Margin Ratio = Gross Profit/Revenue

ii. Operating Profit Margin Ratio

Operating Profit Margin is calculated by dividing operating Profit with Net Sales.
Where the operating profit is the difference between gross profit and sum of operating
costs such as selling, general and administrative expenses.

Operating Profit Margin = Operating Profit/Revenue

iii. Pre-Tax Margin Ratio

Pre-Tax Margin Ratio is calculated by dividing Pre-Tax Income with the total revenue.
Where Pre-Tax Profit is nothing but Operating Profit less interest.
Pre-Tax margin = Earnings Before Tax But After Interest (EBT)/Revenue

iv. Net Profit Margin Ratio

Net Profit Margin refers to the percentage of profit a company generates from its
revenues. In other words, this ratio indicates the amount of net profit a company is able
to generate for every unit of increase in revenue.

Net Profit Margin = Net Income/Revenue

v. Return On Assets Ratio

Return on assets indicates return generated by a company on its assets. A higher return
on assets ratio indicates that the company is able to generate more income from the
given amount of assets.

Return On Assets Formula = (Net Income + Interest (1-Tax Rate))/Average Total Assets

Ratio Analysis Example

A financial and industry analysis for Motorola Corporation was undertaken to
understand the financial position of Motorola in the year 2002 vis-a-vis its competitors.
This analysis was undertaken using financial ratios. However, this study was done for
only two segments in which Motorola operates. These include Semiconductor Industry
and Telecommunication Industry. The various ratios calculated were as follows:
Analysis
When Motorola was compared with the other market players in the semiconductor
industry for various components, following outcome was seen:

 Motorola was found to be a little less liquid as compared to the industry. This was
because both the current ratio and quick ratio (Liquidity Ratios) for Motorola
were less than the industry average.
 Motorola’s average collection period for the year 2002 came around 61 days. It
was found to be lower than the industry average which came out to be 50 days.
This meant that Motorola should analyze its credit policies all over again.
 Both fixed asset as well as total asset turnover ratio for Motorola was higher than
the industry average. This suggested that the company was using its assets more
efficiently as compared to the industry for generating sales.
 Motorola’s debt ratio as well as debt to equity ratio was higher than the industry
average. This pointed towards the fact that Motorola was more leveraged than an
average player in the industry. This meant that Motorola was required to pay
interests irrespective of the market conditions. Thus, such an analysis describes
the poor financial performance on the part of the company.

Similarly, ratios were worked out for Telecommunication Industry players and the same
was compared with the financials of Motorola.
Therefore, the above case study explains the relevance of accounting ratios in analyzing
the financial statements of a company.

So, let’s understand what are the various types of financial ratios and what are their
implications given the above in the backdrop.