Strategic Management: Formulation and Implementation

International Financial Statements

One of the special problems created by the diversity in accounting principle from country to country is that it hinders international investment. The differences in accounting principles can be seen in the balance sheet as well as in the income statements of "foreign" firm. It is especially true when one attempts to analyze the financial statements of a number of firms from different countries. This requires a knowledge of the accounting principles of these countries.

Financial Ratios

To evaluate the financial condition and performance of a organization, managers need use finance ratios analysis. Financial ratios state particular relationship from balance sheets and income statement. Ratio analysis does not merely involve the application of a formula to financial data, but more important is the interpretation of the ratio value.

Financial ratios can be used to show:

  1. The firm's position in its industry.
  2. The degree to which strategic objectives are being accomplished.
  3. The firm's vulnerability to decreases in revenue.
  4. The future borrowing power and growth potential of the firm.
  5. The firm's ability to react to unforseen changes in the environment.
  6. The risk of corporate failure.

Key financial ratios are defined in Table 5-7.