Key Financial Ratios and Analysis of Trends over Time

Instructions:

Identify any trends from the data (you will probably be best to compute this since you aren’t likely to find trends already computed for your schedule examples.) How to compute ratios is explained in numerous places on the net. But computing the ratios is only the first step.

What is important is trend analysis of the ratios over time, and analytic comments about the trend. For example, you might analyze inventory turnover ratio and discover that over time the trend is deteriorating. You would show the trend and offer remarks about why this is occurring and what management intends to do to correct the situation. Bottom line is that investors like to see three things – the raw data, the analysis of the data to point out important trends, and commitments from management how any problems revealed by the data are going to be corrected.

Appreciate that the computation of ratios and analysis of those ratios is very meaningful to investors who use the results to gauge the financial strength of the business. Students should research into the development of ratios, and understanding how to look for trends in ratios over time (e.g. Is the inventory turnover improving or deteriorating from year to year? and; Why is it changing?) They should see how displaying the trends in graphs can yield some useful information about the expected success (or lack of success) that the business is forecast to experience.

Include a brief introductory paragraph before each schedule. And, offer commentary after each schedule highlighting any key points that you would like investors to notice. This is particularly important in the ratio analysis sub section.

Wrap up the Financial Plan with a brief concluding paragraph that sums up the trend indicated by the financial statements.