Dr.

Nusrat Jahan
Faculty, CIUBS
The primary goal of financial management is to maximize shareholders’
wealth, not accounting measures such as net income or earnings per
share (EPS). However, accounting data influence stock prices, and this
data can be used to see why a company is performing the way it is and
where it is heading.
If management is to maximize a firm’s value, it must take advantage of
the firm’s strengths and correct its weaknesses. Financial analysis
involves:
(1)Comparing the firm’s performance to that of other firms in the same
industry and
(2)Evaluating trends in the firm’s financial position over time.
These studies help managers identify deficiencies and take corrective
actions.
RATIO ANALYSIS
Ratios help us evaluate financial statements.
We divide the ratios into five categories:
1. Liquidity ratios, which give an idea of the firm’s ability to pay off
debts that are maturing within a year.

2. Asset management ratios, which give an idea of how efficiently the

firm is using its assets.

3. Debt management ratios, which give an idea of how the firm has
financed its assets as well as the firm’s ability to repay its long-term
debt.

4. Profitability ratios, which give an idea of how profitably the firm is

operating and utilizing its assets.

5. Market value ratios, which gives an idea of what investors think

about the firm and its future prospects.