Time series analysis involves analysing financial information such as ratio over a period of time. trend (indexed statements) the trend of financial ratios variability measures Trend statements This involves computing financial ratios for a series of years for the same firm, and studying their trend. Variability measures. Discerned by observing a trend can be known by computing a measure of variability of the ratio. Combining financial statement and non-financial statement information Other information that may be incorporated into the analysis include: Changes in market share Market perceptions via share price Changes in key management Impact of macroeconomic changes

Top ten ratios of importance in loan assessmentDebt equity ratioCurrent ratioCashflow to long-term liabilitiesFixed charges coverage ratioNet profit after taxNet interest earnedNet profit before taxFinancial leverageInventory turnover in daysAccounts receivables turnover in days

Financial statements analysis cannot substitute for sound judgement

Ratio Analysis Financial ratios derived from the financial statements fall into four main categories: Liquidity ratios Efficiency ratios Profitability ratios Leverage ratios Liquidity ratios Used to determine the ability of the firm to meet its short-term obligations Failure of many business has been due to lack of adequate liquidity. Current Ratio: Current Assets / Current Liabilities Quick Ratio: Quick Assets / Current Liabilities Efficiency ratios Used to determine how efficiently the firm has used its assets These ratios are based on the relationship between the level of activity and the level of various assets. Inventory turnover ratio: Net Sales / Inventory Average collection period: Receivables / Average sales per day Profitability ratios Used to assess the profitability of sales generated through operations Gross Profit–Sales Ratio: Gross Profits / Net Sales Net Profit–Sales Ratio: Net Profits / Net Sales Leverage ratios Used to assess the proportions and manageability of debt carried by a firm Debt–Equity Ratio: Debt / Equity Interest Coverage Ratio: Earnings Before Interest and Taxes / Interest Payable on loans Fixed Charges Coverage Ratio

Lenders analyse financial statements because they help answer the following three important questions, which are the subject of any credit analysis:Should the bank give the requested loan?If the loan is given, will it be repaid together with interest?What is the financial institution's remedy if the assumptions about the loan turn out to be wrong? It is less risky for a lender to give a loan to a business that is finally sound. A sound business possesses the following characteristics: The business has adequate liquidity so it can honour short-term obligations easily. The business is run efficiently. The business is run profitably. The proprietor's stake in the business is high; alternatively, the business is not burdened with too much debt. Lender cannot predict the future repayment (principal and interest) based on the financial statement, but can make a reasonable guess by the analysing the following factors. Trend (time series) analysis.Safety buffer.Stress testing.Industry analysis. Economic analysis.

Financial statements analysis is relevant in business lending. Business borrowers are required by law to keep financial records and prepare financial statements. Every public limited company has to file a copy of its audited and publishes accounts. Business prepare financial statements, which financial institutions require then to submit along with heir loan applications. The key financial statements used by a lender for analysing the financial standing of a business firm are: an income statementa balance sheet, and a statement of cashflows.Lenders invariably obtain financial statements from prospective borrowers and analyse them.The financial statements analysis for a sole proprietorship may be fairly basic compared with that for a public limited company.