Financial Reporting: Long-Term Change of Financial Ratios

Erkki K.  Laitinen

doi:10.4236/ajibm.2018.89128

Erkki K. Laitinen

Abstract: Financial ratios are constructed mathematically as a ratio of numerator and denominator taken from financial statements (income statement or balance sheet). They are useful indicators of financial performance of a firm. However, changes in a particular ratio are difficult to interpret, because they can be related to changes in the numerator, the denominator, or both. Therefore, each change needs an interpretation of its own. The objective of the study is to analyze what kinds of roles have changes in the numerator and the denominator played in the long-term change of a set of financial ratios. The set of ratios consists of seven ratios reflecting profitability and its determinants, liquidity, and long-term solvency. The changes of these ratios are analyzed using the trends of the ratio components for a ten-year period in a sample of 9160 active and 81 bankrupt Finnish firms.

Keywords: Financial Ratios, Ratio Change, Trend Analysis, Financial Statement Analysis, Ratio Interpretation, Finnish Firms, Bankrupt Firms

Cite this paper: Laitinen, E. (2018) Financial Reporting: Long-Term Change of Financial Ratios. American Journal of Industrial and Business Management, 8, 1893-1927. doi: 10.4236/ajibm.2018.89128.

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