Financial Ratio Analysis Business Decisions Essay

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Besides the determination of the course of action, financial statements are critical for soliciting capital from stakeholders, lenders, or forming partnerships. While the information generated from financial institutions is mostly used to develop growth strategies and operations management, it also plays a critical role in determining the company’s competitive abilities. The capital structure is a core area of examination by prospective business partners and the consideration of a merger (Yaghoubi et al., 2016). When making a merger decision, financial managers first examine the capital structure and debt a company bears to determine if they are suitable for partnership. Where a company bears a large debt, but the debt is used for operational expenses, prospective partners or acquirers examine the impact of bearing such debt on their operations and the benefit of having access to the company’s assets to determine if the risk is bearable.

Reference


Yaghoubi, R., Yaghoubi, M., Locke, S., & Gibb, J. (2016). Mergers and acquisitions: a review (part 2). Studies In Economics and Finance, 33(3), 437-464. https://doi.org/10.1108/sef-07-2015-0165

Response to Peer Discussion 4


While conducting internal and external financial audits, auditors rely more on the information generated from financial ratios than the reports presented by an organization to make judgments of the business performance and management practices.

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Financial ratios help uncover core decisions by managers that otherwise would not have been uncovered by relying on financial reports. When conducted internally, financial ratios can offer insights on the feasibility of different investment opportunities using ratios such as internal rate of return (IRR) and net present value (NPV) (Pilvere-Javorska, Pilvere., & Rivža, 2020). The external examinations of a company use financial ratios to explore if the company’s financial structure is suitable for investment. These analyses examine the macroeconomic environment of a business and the internal environment of the business (Kotane & Kuzmina-Merlino, 2012). For example, EBIT?EPS analysis is useful in evaluating the relative efficiency of product lines, markets, and departments. Further, this allows for a risk assessment of the risk vulnerability associated with them.

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