A ratio analysis report includes mathematical formulas that break down a company’s financial statements. To create a usable report, accountants and finance analysts need to follow a few basic steps. These steps include clearly identifying the data under review, separating data reviewed by ratio groups, and drawing comparisons with the ratios to a benchmark. Other minor steps may be possible so the report matches the designs and needs of the end users. Owners, executives, and managers must be able read and understand the ratio analysis report in a format familiar to them.
Financial statements often contain a large set of numbers, disclosures, and other information for stakeholders. While a trend report may be able to show if the current financial statements contain data that is increasing or decreasing, a lack of benchmarks may be found here. The ratio analysis report presents benchmarks that demonstrate if specific parts of a company are better or worse off than a previous time period. Investors often use ratios to assess a company’s financial strength. Decreasing ratios can indicate financial difficulties unless a company changes its operations to more profitable ventures.
Multiple ratio groups are possible on a ratio analysis report. The groups most commonly seen on this report are liquidity, asset turnover, financial leverage, and profitability. Each ratio group uses specific data taken from the company’s financial statements. Accountants place all ratios computed under their respective headings or groups of ratios. Specific ratios typically have no order as accountants may compute whichever ones they deem most important for each specific group on the report.
Financial ratios computed on their own are typically useless. For example, if a ratio analysis report simply contains a set of ratios next to financial data, the numbers have no meaning. Accountants must draw a comparison to some other figure in order for the numbers to actually have meaning. For example, a common set of information on the report is to place the industry average for each ratio next to the company’s ratios. In this manner, the ratio analysis report provides benchmarks for analyzing the company’s financial performance.
Accountants can prepare a ratio analysis report on a monthly basis. The report is in addition to the company’s standard financials. Financial ratios tend to be a more internal report, though external stakeholders can prepare their own reports if they desire. The publicly released financial statements should offer the requisite data for preparing financial ratios.