Analyzing ratios

One of the most important applications of ratio analysis is to compare a company's performance with that of other players in the industry or to compare its own performance over a period of time. Such analyses are referred to as a comparative analysis and trend analysis, respectively.

The analysis that involves calculating the growth rates of all items from the balance sheet and income statement relative to a base year is called a:

Common size income statement analysis

Percentage change analysis

Cash flow change analysis

Common size balance sheet analysis

Suppose you are conducting an analysis of the financial performance of Blue Hamster Manufacturing Inc. over the past three years.

The company did not issue new shares during these three years, and has faced some operational difficulties. The company has thus pilot tested some new forecasting strategies for better operations management. You have collected the company's relevant financial data, made reasonable assumptions based on the information available, and calculated the following ratios.

Ratios Calculated

$\backslash$table$[[,$Year $1,$Year $2,$Year $3],[$Price to cash flow,$2\mathrm{.}80,1\mathrm{.}96,1\mathrm{.}57],[$Inventory turnover,$5\mathrm{.}60,4\mathrm{.}48,3\mathrm{.}58],[$Debt to equity,$0\mathrm{.}60,0\mathrm{.}48,0\mathrm{.}38]]$