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, 5th. Using the data from the case study, repond to the tasks below.
Tasks:
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?