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Financial statements are used to report the status of the firm at one point in time as well

as the results of its operations of the previous year. However, the real use comes in the
effective analysis to predict the future income and dividends along with the risks
associated with these variables. (Melicher 2008)
There is an assortment of analytical methods - trend analysis, common size analysis,
ratio analysis, segmental analysis and cash flow analysis (Alexander 2007), and out of
the various methods in use, financial ratios are the corner stone of financial statement
analyses (Horngren 2004) as they capture the critical dimensions of the economic
performance of the firm (Horngren 2004).
Financial ratios are the most widely used among other measures of financial
performance of a firm. Ratio analysis can be considered a means to determine a firms
strengths and weaknesses (Melicher 2008) and are increasingly being used as a tool by
management to guide, measure and subsequently reward the employees; Hewitt
associates, a compensation consulting firm reports that 60% of the 1941 large firms
have profit sharing programs (Horngren 2004).
Besides the obvious uses, ratios have also been used in forecasting potential corporate
bankruptcies, classifying a potential customers credit rating; and lately there is research
into models to identify potential takeovers and also to value shares. This is made
possible because of progress in application of statistical techniques to ratios. This has
resulted in improvement of the quality of a general picture of a company through timeline
analysis and line-of-business analysis (Pendelbury 2004).
In trend analysis, a base year is chosen as a benchmark and the various elements are
shown as an index of this benchmark. Literature suggests a minimum of 5 year time
frame (Alexander 2007) to check how the various items in a balance sheet have changes
over time. In a common size analysis the financial statements items are compared with
the peer group, and to remove the size effect, the balance sheet items are expressed in
terms of percentage of revenue and the balance sheet items in terms of percentage of
assets (Alexander 2007).
Financial ratios are employed widely by all parties interested in an enterprise: the
owners, management, personnel, customers, suppliers, competitors, regulatory agencies,
and academics, each with their own objectives on application (Salmi 1994). All users
will no doubt be interested in the future prospects and different users would have varied
requirements based on the decisions required to be taken (Pendelbury 2004).
Potential shareholders would examine the financial statements as an excellent source of
information about a company (Melicher 2008) before they decide to invest in a
companys shares. Subsequently they will continually assess their investments and
some of the results may be translated into buy, hold, or sell decisions. There are
ratios specifically made for investors which focus on the returns to be obtained in the form
of dividends or capital appreciation (Alexander 2007). Practitioners (analysts) use financial
ratios to forecast the future prospects of a firm,
whereas the researchers aim to exploit the ratios for creation of better models (Salmi
1994).
Practitioners (analysts) use financial ratios to forecast the future prospects of a firm,
whereas the researchers aim to exploit the ratios for creation of better models (Salmi
1994).
ROCE reflects a companys ability to earn a return on all of the capital that the
company employs. It can help investors see through growth forecasts, and it can often
serve as a reliable measure of corporate performance. But ROCE is also an efficiency
measure of sorts; ROCE doesnt just gauge profitability as profit margin ratios do, it
measures profitability after factoring in the amount of capital used. Because ROCE
measures profitability in relation to invested capital, ROCE is important for capitalintensive
companies, or firms that require large upfront investments to start producing
goods.
A companys ROCE should always be compared to the current cost of borrowing.
ROCE is therefore a better measure of the return of a real estate company as it considers
leverage, which is an integral source of funding in this sector. As real estate companies
are traditionally highly leveraged, it is essential to ensure that any company generates
adequate returns to cover its high cost of capital.
Melicher, R W and Norton, E A (2008) Introduction to Finance: Markets, Investments,
and Financial Management. 13th ed. New Jersey: John Wiley & Sons.
Alexander, D, Britton, A and Jorissen, A (2007) Techniques of Financial Analysis.
International Financial Reporting and Analysis, 3rd ed. London: Thomson Learning.
Horngren, T H, Sundem, G L and Elliott, J A (2004) Introduction to Financial
Accounting. 8th ed. Delhi: Pearson Education.
Pendelbury, M and Groves, R (2004) Company Accounts: Analysis, Interpretation, And
Understanding, 6th ed. London: Thomson Learning.
Salmi, T and Martikainen, T (1994) A Review of the Theoretical and Empirical Basis of
Financial Ratio Analysis. The Finnish Journal of Business Economics, 4(94), 426-448.
Salmi, T, Jussi, N and Petrisahl, S (2005) The Review of the Theoretical and Empirical
Basis of Financial Ratio Analysis Revisited. University Of Vaasa, Finland.
Butani, M. (2010). PILOT STUDY: FINANCIAL RATIO BENCHMARKS FOR
REAL ESTATE COMPANIES OF THE G.C.C.. A dissertation submitted in partial
fulfilment of the requirements for the degree of Master of Science in Quantity
Surveying.