Having learnt to prepare financial statements now we proceed to learn how to use and analyse the information contained in those financial statements: (i) how to calculate, interpret and use financial ratios; (ii) how to plan and take action to avoid cash deficits during the life of the company; (iii) how to implement actions to reach targets in profitability.
(i) Financial Ratios
By learning how to calculate, interpret and use financial ratios we will understand how to assess the financial strength of a firm, to analyse management effectiveness in employing capital, and how solvent and profitable is the company.
The information contained in the Income Statement and Balance Sheet is essential to obtain financial ratios:
(a) liquidity ratios; (b) effectiveness ratios; (c) profitability ratios and (d) leverage ratios.
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