Question

What type of financial statement analysis is most useful for internal management? How does management evaluate and use the results of this analysis? How will financial statement analysis affect decisions related to capital structure decisions?

Answer 1

Financial Statement analysis is very much important for internal management and capital structure decision.

Different types financial ration and operation related ratio helps in taking internal management. E.g. If a firms Current Ratio is high but cash ratio is low indicates company's is short of cash and it is facing difficulty in selling out it's stock and inventory is increasing due to unsold products. If a firms Gross Margin is low, then it is indicating company's operational inefficiency. This company should invest more to bring operational efficiency to the company.

Different Long Term Ratio helps to determine suitable capital structure for a company. If a company has good gross margin as per industry standard and low net margin , this indicates company has high debt. Generally, If debt-equity ratio is more than 1, then it is considered as risky. Company should bring it's debt level lower enough to benefit it's equity share holder.

This way, different financial ratio and figures helps in taking decision regarding internal management and capital structure decision.