Primary Markets vs. Secondary Markets
The buying and selling of financial securities is a complex process that has evolved over many years. Each security represents a claim on the financial resources of a firm. The claim could be an equity claim or a debt-related claim. When a retail investor looks at the stock market, they see only the market where […]
Advantages and Disadvantages of Swingline Loans
In the previous article, we have already studied what Swingline loans are. We now know that such loans are different from revolving credit which is offered by many commercial banks. Over the years, Swingline loans have come to occupy a very important place in commercial banking. There are some people who believe Swingline loans are […]
Operating Cash Flow to Sales Ratio – Formula, Assumptions and Interpretation
Formula The formula for this ratio can be easily judged by its name: Operating Cash Flow to Sales Ratio = Operating Cash Flow / Sales Meaning Used Over a Period of Time: Conclusions must not be drawn based on a single number. A company may be able to convert its sales to cash for one […]
Circular References in Financial Modelling
A lot of financial modeling takes place in Microsoft Excel. One of the errors that financial modelers come across during the financial modeling process is called the “Circular Reference” error. This error can affect many values in any model. To an untrained financial modeler, this could be the source of a lot of panic. However, […]
Internet Only Banks
Concept of Internet Only Banks With the advent of internet banking, a large part of the services that are offered by banks can be provided online as well. Therefore, a lot of entrepreneurs were of the opinion that brick and mortar banks have become obsolete in retail banking just as brick and mortar stores have […]
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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