Financial Ratio Analysis In Financial Performance

Good Essays
Investors usually compare between the amount they have to spend and the expected return from their investment. If there is a significant benefit, they intend to invest more in a company. Consequently, they monitor the interested company’s performance regularly and do the comparison with others in the same industry.

In Lewellen (2004) research, he said that financial ratios like earnings per share, price earnings and dividend ratios can be used for prediction return. As per the paper, if the share is overpriced, the ratios are low and therefore the estimated future return will be low. The changes in earnings per share would affect the dividend ratios. Yet, we cannot use the financial ratios alone in order to predict the stock price. Both the flow of ratios and market information supports management to forecast the more realistic stock price.

A similar point was made by Turk (2006) and the stock price changes are directly related to the market information and no relationship with the financial ratios. Moreover, the data analysis system will be required in order to predict the future return. Nonetheless, earnings per share (EPS) ratio, price-earnings
…show more content…
Using financial ratios, we could at least alert management regarding to their performance. Planning financial aims and future operating environments direct our concerns towards the changes in performance results. If there is a major changes in performance trends, the firms’ financial success or fails will put-forward to review first. Furthermore, we can examine whether the certain items of financial structure have a problem by comparing a company’s data with those similar company. On the whole, researchers suggest that every business entity should use the ratio analysis because of the following significant
Get Access