MBA ASAP Podcast Episode 1: Financial Ratio Analysis
There are essentially two basic techniques that are used in Corporate Finance. One is the ratio analysis of financial statements and the other is calculating the present value of future cash flows. Bankers, investors, financiers, CFOs and entrepreneurs use these tools and techniques to value assets and make decisions.
In this Podcast episode look at using financial ratios as a capital budgeting tool. There are lots of different accounting ratios that get used inside of a firm. In fact, a lot of times the same accounting ratio gets called different things at different firms.
By ratio analysis I mean taking two numbers from financial statements and dividing one by the other. What we are doing is taking two pieces of accounting data, put one over the other, and this forms a ratio. We are taking two pieces of data and forming a performance metric. Ratios are usually presented as a percentage or a number depending on whether the usual case is bigger or less than one.
Besides being a capital budgeting tool, ratios allow us to compare different companies or a company over time. Ratios are great tools to do this comparison because they allow us to “normalize” the numbers. A ratio eliminates any size differences and allows for pure comparison so you can compare apples to apples.
Financial ratios are derived from accounting information and rely on an understanding of financial statements. If you need a primer on the subject check out MBA ASAP 10 Minutes to Understanding Financial Statements. It will get you up to speed on this critical business skill quickly.
The National Association of Certified Valuators and Analysts are using this book as a pre-read in all their programs. Its worth your reviewing.
This podcast and the above blog post are derived from my book MBA ASAP Understanding Corporate Finance. This is a short concise volume that presents the fundamental scope of Corporate Finance. Its available from Amazon as an eBook, paperback, or audiobook. Check it out!