Financial Analysis of Business Combinations (Ratios)

Abstract

Financial statement analysis (FSA) uses information in financial statements to form expectations about a company’s current and future financial performance so that users will be able to make informed investment, credit, and other economic decisions. One common way of analyzing financial statements is by using financial ratios. However, while accounting and financial reporting are subject to strict rules, the use of financial ratios is not governed by rules and regulations, and thus may differ substantially across users of financial information. We begin this chapter by introducing basic financial statement reformulations and ratio analysis techniques. Then, we assess the effect of accounting methods for intercorporate investments on financial ratios. In particular, we discuss and demonstrate how the equity method, full consolidation and proportionate consolidation affect profitability, efficiency, liquidity, and capital structure ratios.