Estimating Project Cash Flows: Part 1
Prima facie, capital budgeting may seem like a very simple task. After all, it has just 3 steps. The first is to find the cash flows, the second is to find the appropriate discount rate that represents the time value and riskiness of those cash flows and the third step is to use both these […]
Why Unicorn Companies Fail?
Startup companies typically have a high failure rate. It is said that 90% of all startup companies fail. The percentage of companies failing keeps on reducing as the company grows and obtains more funding. Ideally, when a company becomes a unicorn i.e. achieves a valuation of $1 billion, then there shouldn’t be any chances of […]
Introduction to Financial Markets and Institutions
There are certain types of financial markets and financial institutions that are found in almost every country in the world. For instance, most countries where economic activities take place have an established stock exchange and a banking system. Each of these institutions is different and hence perform different functions. However, together, these financial markets and […]
Start-Ups and Public Relations
Almost every start-up firm tries to increase its sales. However, convincing more customers can be a very difficult task. It is common for start-up companies to have significant marketing budgets. However, most of the budget is utilized for direct marketing. There are very few start-up companies that believe that public relations can help them achieve […]
Technology Risks In Commercial Banking: KfW Bank Case Study
The speed at which commercial banking is being automated is astounding. The automation process is about two decades old. However, over time, many difficult processes have been automated. However, commercial banks have realized that automation can be a double-edged sword and can sometimes lead to spectacular blunders which can impact the reputation of the bank. […]
Ratio, as the name suggests, is nothing more than one number divided by the other. However, they become useful when they are put in some sort of context. This means that when an analysts looks at the number resulting out of a ratio calculation he/she must have a reasonable basis to compare it with. Only when the analyst looks at the number and compares it what the ideal state of affairs should be like, do the numbers become powerful tool of management and financial analysis.
Dividing numbers and obtaining ratios is therefore not the main skill. In fact this part can be automated and done by the computer. Companies wouldn’t want to pay analysts for doing simple division, would they?. The real skill lies in being able to interpret these numbers. Here are some common techniques used in the interpretation of these numbers.
Horizontal analysis is an industry jargon for comparison of the same ratio over time. Once a ratio is calculated, it is compared with what the value was in the previous quarter, the previous years, or many years in case the analyst is trying to make a trend. This provides more information of two grounds. They are:
Cross sectional ratio analysis is the industry jargon used to denote comparison of ratios with other companies. The other companies may or may not belong to the same industry. Cross sectional analysis helps an analyst understand how well a company is performing relative to its peers. In a way this removes the effect of business cycles. There are many variations of cross sectional analysis. They are as follows:
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