Axel Tracy - Ratio Analysis Fundamentals

By Axel Tracy

Copyright 2012 BidiCapital Pty Ltd.

All rightsreserved.

Published by BidiCapital Pty Ltd at Smashwords

Cover Design: NaturalSelection Web Design LLC

Smashwords Edition,License Notes

This eBook is licensedfor your personal enjoyment only. This eBook may not be re-sold orgiven away to other people. If you would like to share this bookwith another person, please purchase an additional copy for eachrecipient. If youre reading this book and did not purchase it, orit was not purchased for your use only, then please return to yourfavourite eBook retailer and purchase your own copy. Thank you forrespecting the hard work of this author.

Disclaimer

The material in thispublication (the book) and the information accessed through it isof a general nature only and does not contain investmentrecommendations or professional advice. The information is not tobe relied upon as being accurate, complete or up to date. AxelTracy (the author) recommends that, before acting or not actingupon information contained or referred to in this book, readersshould seek independent professional advice that takes into accounttheir financial situation, investment objectives, particular needsand/or other personal circumstances. The information contained inthis book is not to be used for any purpose other than educationalpurposes and it is not to be construed as an indication orprediction of future results from any investment. Axel Tracy doesnot offer financial, business or academic advice. To the maximumextent permitted by law, the author and publisher disclaim allresponsibility and liability to any person, arising from directlyor indirectly from any person taking or not taking action basedupon the information in this publication.

For Sarah:Thanks for the ongoing love and inspiration.

For Mum &Dad: Nothing I have achieved, or will ever achieve, would bepossible without you both.

Table ofContents

About the Author

Axel Tracy is anaccounting and business student at the University of Technology,Sydney (UTS). He has a passion for his studies and is a member ofthe invitation-only Golden Key International Honours Society inrecognition of having a GPA that placed him in the top bracket ofstudents at his university. He is also a member of the UTS HonourSociety.

He was employed bythe University of Technology, Sydney, to run PASS sessions in thesubject of Accounting Standards and Regulations; an undergraduateaccounting subject that trains students to become familiar withAustralias implementation of International Financial ReportingStandards and the current Australian accounting standard regime. Hewas also employed by UTS as a one-on-one tutor for the study ofanother 2nd year accounting subject, Accounting for BusinessCombinations, a subject that dealt with the financial accounting ofcorporate groups, joint ventures and associates.

Since April 2011,he has been the Founder & Manager of RatioAnalysis.net, awebsite dedicated to financial and accounting ratios. In August2013, Axel launched accofina.com. This website promotes the sale ofproducts involved with accounting and finance knowledge andeducation.

Axel lives inArmidale, Australia, and apart from studies or working, enjoysspending time with his partner, Sarah, or enjoying a good cup ofcoffee.

accofina.com launched inAugust, 2013, and is a hub for accounting & finance knowledgeand technology.

On the website youwill find Books, Apps, Online Courses & Tutorials, MS ExcelSpreadsheets and other Online Calculators all customized to assistputting academic accounting & finance knowledge, throughtechnology, in the hands of businesspeople, investors andstudents.

accofina.com ispart of Bidi Capital Pty Ltd, which is a company founded, directedand owned by this books author, Axel Tracy.

Revisedand improved content in many sections as a result of the author'sfurther research.

Updated formattingto assist reading experience on mobile devices.

Removal ofspelling and grammatical errors to reduce confusion and improveprofessionalism.

Do you look at financialstatements and not know what they mean, or more importantly whatyou can learn about a business from them? Is a lack of accountingtraining holding you back from getting value from these importantfinancial documents? This book aims to address these problemsthrough the application of ratio analysis, which is one use derivedfrom a business financial statements.

The financialstatements, these being the Income Statement, Balance Sheet &Cash Flow Statement, allow you to tell the story of a business.You can tell its history, its strengths and weaknesses andsometimes even its future. Financial numbers alone will not tellyou everything about a business. For instance (and according toKaplan and Nortons Balanced Scorecard theory) its important toassess how customers perceive the business. But when it comes tothe overarching business goals (how shareholders and owners viewthe business), and the breadth of information that financial datacan summarize (every department of a business and most activitiesthe business carries out can usually be translated into financialform), an appreciation of the financial statements is vital.

The financialstatements are three pieces of paper, or three worksheets of aspreadsheet, that are recognized as being a summary of the businessover the preceding or current period. The statements tell a concisestory that can be used by investors and managers to test and assessstrategy, as well as assist in putting together action plans inregards to whether or not to buy, hold or sell a stock or what todo internally within the business. But being able to look behindthe numbers and gleam this story takes some skill. However, notlots of skill! Accountants, like many professions, like to maketheir skills seem more complicated than what they really are; afterall, this allows them to charge higher fees. But ANY businessmanager, investor or student can quickly learn some key techniquesthat will allow them to tell the story of almost any business onthe planet. This is what this book is for! There are multiple formsof financial statement analysis, whether its horizontal andvertical analysis, valuation techniques or even capital budgetingdecision making. This book aims at introducing the technique ofratio analysis, the concept of combining multiple aspects of thethree statements (to form ratios) and then using the results toassess the success, or lack of it, of a business or investment.

I am not primarilyan author, Im just a plain accounting student and over the pastfew years I have been learning how to use the financial statementsto tell a story through ratio analysis and financial statementanalysis. I have done this by breaking down complicated jargon andforeign concepts into little sections of understandable knowledge.But if this is all foreign to you now, I must warn you thataccounting is littered with jargon. Accountants have the ability toturn vast amounts of data into actionable information, but theytend to give their own names to this actionable information andin effect create a language of their own. And if this is allforeign to you: firstly, congratulations on taking the first steps,you wont regret it. Secondly, in this book I will try to clearly,simply and concisely break down this foreign language and itsarithmetic tools into something more digestible, irrespective ofwhether youre a marketer, barista, production manager or even aretiree managing their nest egg. That is, putting seeminglyunrelated, black & white numbers into concepts, tools andtechniques that can be understood and applied by anyone who hassome high-school arithmetic capabilities into analysing a business.Honestly, I dont like mathematics, but accounting mathematics isbasically just simple arithmetic, and best of all, what you can dowith a few simple calculations and ratios could take your business,investments or career to a level you thought would only beachievable with the help of a high-priced consultant. And even ifthis book cant replace that consultant, then at least you shouldbe able to converse with them better, understand where they arecoming from or even check up on them or have the ability toquestion them with more force.