Financial Ratios Essay

2504 words - 10 pages

IntroductionEvery organisation aims to maintain its market dominant position as well as to maximise its profitability through a series of activities, so as to remain competitive within framework of the market mechanism and to advance functions. It is necessary for managers to be familiar with the overall performance of the enterprise, in an effort to develop an effective strategic plan for companies' prosperity and progress. Thus it is essential to identify the capabilities of a company in economic terms, so as to enable first line management to determine the business's objectives and targets, concerning its operations.In an effort to examine an organisation in financial terms, so as to provide managers with sufficient information, referring to its economic evolution, certain financial statements have evolved, such as Balance Sheet, Trial Balance, Profit and Loss Account, Ratios and so on.A company's published report and accounts will contain a confusing set out of figures. Whilst these figures will all be based on historical facts and can be taken as accurate, a question arises; what do these figures mean? An answer to these question will require an analysis of the figures contained within published report and accounts, using a series of Financial Ratios.In this assessment, we will analyse and critically evaluate the most common financial ratios by incorporating examples relevant to BMW(GB) Limited. This assessment will be focusing mainly on the company BMW (GB); we will also compare the results to those of MG Rover Group Limited. These financial ratios have been applied according to most recent figures that appear on the Athens-Fame electronic library.Accounting RatiosA ratio analysis transforms accounting numbers into meaningful ratios that highlight strengths and weaknesses of a business. This analysis does not require a thorough understanding of accounting or finance to be used.There are many different groups of people (or stakeholders) who are interested in the accounts of a company, including:1) The management and the employees - to see if pay rises are likely, or2) To ensure that their jobs are secure.2) Creditors - to ensure that the business has the necessary money to repay them.3) Potential lenders - to see if the business is solvent and profitable enough to repay any loans.4) The community - to ensure that jobs and services for the local community are assured.Using financial ratios can assist these people in identifying the financial strengths and weaknesses of a company, as well as indicating to the company itself those areas that need corrective action.However, ratio analysis does not provide a complete and exhaustive analysis of a company, and there are several other factors that the stakeholders and the company will need to take into account, in order to get the 'full picture' of its financial position:- The state of the economy (i.e. if the economy is in a recession, then the ratios are more likely to be unsatisfactory than if...

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