Introduction

Click here to view a video on the Analysis of Financial Statements.

It is important to realise that the analysing of financial reports is as important as the financial statements itself, if not more important.

It will have no sense in having financial statements for your company if you do not know how to interpret the different figures and to determine if the business has performed better or worse compared to the previous years.

It is not only the directors who should be interested in the financial ratios, but also the banks, as suppliers of funding, investors, creditors, etc.

Financial ratios are a simple, but effective way of analysing and interpreting financial statements. By calculating only a few ratios it is possible to determine the health of an organisation, without having to study complex sets of financial statements.

Financial ratios are calculated by expressing one figure (or sets of figures) from the financial statements in relation to another figure.

The results are sometimes expressed in % or it could be Rands, days, or times per year.