Comparative Analysis Comparative analysis is the item-by-item comparison of two or more comparable alternatives, processes, products, qualifications, sets of data, systems, or the like (comparative analysis, ND). Comparative analysis can be used when comparing two different years of financial statements. This analysis can also be used when a business is trends of a company. Ratio Analysis According to “Investigated. Com” (2015), “Quantitative analysis of information is contained in a company’s financial statements.
Ratio analysis is based on line items in financial statements like the balance sheet, income statement and cash low statement; the ratios of one item, or a combination of items, to another item or combination are then calculated. Ratio analysis is used to evaluate various aspects of a company’s operating and financial performance such as its efficiency, liquidity, profitability, and solvency. The trend of these ratios over time is studied to check whether they are improving or deteriorating.
Ratios are also compared across different companies in the same sector to see how they stack up, and to get an idea of comparative valuations. Ratio analysis is a cornerstone of fundamental analysis” (Ratio Analysis). Purpose and Importance of Comparative Analysis The purpose and importance of comparative analysis is to assess the financial performance of a company. Investors are interested in the sustainable earnings and use them to make comparisons from period to period.
Comparison analysis are used for interactions, where a company can detect changes in financial relationships and significant trends, interception comparisons, which a company can use to provide insight into their competitive position, and industry averages comparisons, which show how a company compares to other impasses in the industry. There are three tools that help with the comparative analysis, horizontal analysis, vertical analysis, and ratio analysis (Skimmed, Weakened, & Skies, 2011).
Purpose and Importance of Ratio Analysis Also according to “Investigated. Com” (201 5), ‘While there are numerous financial ratios, most investors are familiar with a few key ratios, particularly the ones that are relatively easy to calculate. Some of these ratios include the current ratio, return on equity, the debt-equity ratio, the dividend payout ratio and the price/ earnings (PIE) ratio.
For a specific ratio, most companies have values that fall within a certain range. A company whose ratio falls outside the range may be regarded as grossly undervalued or overvalued, depending on the ratio” (Ratio Analysis). Differences between Comparative and Ratio Analysis Comparative analysis is the comparison a company’s financial statements over several accounting periods, usually two or more, to determine a company’s future performance.
This analysis allows for the presentation of a company’s financial statements together to determine possible trends. While comparative analysis is the tool used to evaluate and compare these statements, ratio analysis is the method used to evaluate the relationship between selected items on financial statements such as, liquidity ratios which examines a company’s short term ability to pay obligations or solvency ratios that examine a company’s longevity.
Comparative and ratio analysis work together to provide a complete picture of a company’s performance. Conclusion In this assignment Learning Team C members have collaborated in this paper to discuss the key differences between comparative and ratio analysis. In addition, we also included what the utilization of each would be is used for as well as the advantages and disadvantages between the two in given scenarios.
Lastly we as a team we came to the conclusion through our discussion that the comparative and ratio analysis are both extremely important components that assist in illustrating a company’s financial infrastructure. We came to the conclusion without either tool you may not be able to have a full understanding where a company is against their competitors, how they match up with changing trends s well as where they stand presently as well as the they are headed in the future as a company in the market place.