• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

"It is meaningless to financially analyse a company without understanding the context and environment in which it operates". Discuss to what extent you agree with this statement.

Extracts from this document...

Introduction

"It is meaningless to financially analyse a company without understanding the context and environment in which it operates". Discuss to what extent you agree with this statement. Introduction Financial analysis is the use of financial statements to analyze a company's financial position and performance, and to assess future financial performance.1 Therefore, it is a subjective and complex task. To effectively accomplish this task we should adopt interdisciplinary perspective. This includes understanding the context and environment in which a company operates. So, this essay is tending to discuss the understanding of context and environment in which to interpret the financial statement, and examine it is an important and essential part of financial analysis. To examine this discussion, this essay is divided into four main parts: the first part illustrates the important role of the context and environment in which a company operates through a discussion of MicroStrategy case ; the second part examines some interpretation problems arising from ratio analysis, and consequently argues the acontextual financial analysis is inherently limited; the third part specifically considers the foreign environment; finally, the fourth part draws a conclusion about this discussion. Part 1: MicroStrategy In March 2000, MicroStrategy (MSTR), a worldwide software company, announced that it was revising its financial results. Sales would be lowered by roughly 25 percent, from $205 million to about $150 million; and profits would be adjusted from 15 cent a share gain to a 43 cent a share loss. ...read more.

Middle

The usefulness of ratios depends on our skilful application and interpretation of them, and consequently there are some problems arising from the using of ratio analysis. Firstly, Ratio might be interpreted in isolation, and might not be considered in the context of the company's other ratios. Example (1), company A maintains a current ratio (current assets divided y current liabilities) well below 1.00, which if viewed by itself could signify a solvency problem. However, the company's strong earning power and cash flows provide adequate cash to meet the company's need. Therefore, to more meaningful, a ratio must refer to an economically important relation. Secondly, the analysts could ignore the factors can affect the effectiveness of ratios. It must be recognized that a substantial amount of important information is not included in a company's financial statements. These events involving such things as industry changes, management changes, competitors' actions, technological developments, government actions, and union activities are often critical to a company's successful operation, and so on.6 Without considering these events, the accounting data is unreliable. Consequently, the ratios based on those unreliable data will lack insight. This point is illustrated in MicroStrategy case study in Part 1. So, to successfully predict of corporate performance we must assess the unrecorded events potentially influencing future ratios. Thirdly, the analysts might choose misleading ratios caused by the difficult problem of achieving comparability among firms in a given industry. ...read more.

Conclusion

Mostly, financial information provided by the company is the base of the choice to buy or sell a foreign security for the investors. So, the investors have to challenge of analyzing and interpreting financial statements prepared according to foreign accounting. Since the accounting system in a country is a product of the social, economic, political, and cultural environment, it is difficult to make meaningful comparison across companies in different countries. 11 An interesting research in this area is from the Choi et al. (1983).12 Such as, raising capital through equity issuances in Japan is relatively unusual for a number of reasons, one of which is that the local banks and government play a particular role in providing debt capital. Some research also reported Japanese managers are much less concerned with short term profits than U.S managers, and are likely to make investment that maximize long-term profitability. In general, they found Japanese were much higher rate and lower net income. Therefore, understanding the foreign environment in which a foreign company is based will achieve a successful of financial analysis. Part 4: Conclusion To sum up, this essay has discussed that accounting data itself alone is invaluable. The lessons from MicroStrategy case have proved this point. Then, the essay has discussed how to make accounting figures more meaningful through analyzing ratio analysis, and found contextualized analysis is a better approach to achieve the goal of financial analysis by comparing with the acontextual analysis. We also have considered the international situation for foreign analysts. Finally, without doubt, contextualized analysing manner is necessary in the international situation. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Finance section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Finance essays

  1. Financial analysis of Wipro ltd. The ratio analysis of the company has been derived ...

    2.1.2 Trend Analysis of total current assets Table 2.1.4 Trend Analysis of total Liabilities Year 2003-04 2004-05 2005-06 2006-07 2007-08 Total Liabilities 100 102.817 172.991 133.59 130.504 Figure 2.1.3 Trend Analysis of total Liabilities Interpretation * The total liabilities is highest in 2005-06.

  2. This group assignment of Financial Management will assess the positions financial performances for six ...

    Hence, fixed asset turnover becomes more important to Hup Seng. Compare to Hup Seng, QL is lower in stock turnover and it is increasing in an overall basis. A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort.

  1. Project on portfolio management in Mutual Funds. The analysis and advice presented in ...

    In th last 3 months too, both the funds were behind bse100 but all the three gave negative returns and the difference between them and benchmark was narrowed down. Again, during last 1 month return of all three got positive but the funds always remained behind the benchmark.

  2. HDFC Life InsuranceCompany Limited

    AA+ 1.33% 8.90% DSP MERRILL NCD MD 28112009 AA+ 0.07% 10.50% GE Capital Ser NCD 16-JUL-2009 AAA 1.00% 8.60% Mahindra Finance Ltd. Mat.18/05/2009 AA 0.51% 11.03% TML Financial Ser MD21.05.09 A 0.35% 10.64% TML Financial Ser MD 13.07.09 A 0.23% 18% UNITECH NCD MAT 15/10/2009 BB- 0.54% 11.15% HDFC NCD

  1. Hampton Machine Tool Company

    But since the prevailing rate of market interest was not given, and since interest rates for short-term loans are generally larger than interest rates for short-term investments and cash equivalents, it would be reasonable to assume that the returns from lending to Hampton the $350,000 would be greater than investing in short-term investments.

  2. Airplane industry analysis. This report will consider the companies which have been chosen ...

    In order to improve fuel conservation, the IATA issued a checklist on fuel and emissions to member airlines in 2005. These guidelines were introduced to assist airlines to be more eco-friendly. (New Airplane, 2009) 5.0 The Financial Appraisal - Chosen Ratios In order to determine the strengths and weaknesses of

  1. Financial Analysis

    And as Vietnam becomes a car economy with a net- work of highways, radial ply tires are expected to gradually supersede the current bias ply. Which is why DRC is currently building its first radial ply factory scheduled to come into operation at the end of FY2011.

  2. Financial Statements

    Now that I have established what the main factors of the profit and loss account are, I can look into how these factors are used to create a financial picture of an organisation at a given period of time. Just as like the balance sheet, the profit and loss account is also analysed and interpreted using ratios.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work