| Ratio analysis is a method of determining the various financial relationships which would suggest the degree of financial health of a firm. The common marks to determine financial health include liquidity, profitability, and debt/equity position. The ratios are designed to compare the current business activity (1) with that of prior time periods or (2) with that of similar firms in the same industry. The franchisor develops a series of financial ratios on each of the franchisees for purposes of comparison. Such analyses help the franchisor understand the variances in
different geographic sectors as well as the differing market/competitive intensities of the various franchisees in the franchise system. Ratio analysis is used to "red flag" key fiscal areas for further analysis and review.
Financial Ratios do not have much significance unless they can be
compared with other financial ratios. First, within the
franchised business, comparisons with ratios from previous years
provide an indication of the current state of the firm's financial
affairs. Second, comparisons of the business with like
businesses within the industry hop provide an understanding of how
well this firm serves its customers in contrast to the average firm.
Calculate and compare to the industry averages. Explain what each ratio means in light of industry averages. Industry averages can be found in the Robert Morris and Associates Annual Statement Studies Book.
This book can be found in most libraries.
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