Understanding and interpreting financial statements Essay - 1

Understanding and interpreting financial statements - Essay Example report on the financial performance of Siemens, a German high tech company by comparing it with that of Nokia, one of its competitors in the industry. The value and limitations of using ratio analysis would be evaluated and accounting issues that would surface would be discussed. Recommendation to potential investors on the basis of findings from the analysis would be made accordingly, To understand the profitability of the company would lead for further understanding the rest of company’s financial report. Every business organization should aim for profitability as a way to recovering is opportunity cost of doing its business. Profitability therefore implies having more a net advantage for every business transaction for the company. Thus generally as expenses are incurred which would represent the cost, there should be corresponding benefit in terms of revenues. Deducting expenses that include cost of goods and service, cost of operation, cost of taxes and other expenses from revenues would therefore mean profit or net income from the for the company. This net income figure could also be divided with the amount of resources that the stockholders put into the business organization, would produce the return on equity (ROE). Comparing the Siemens’ ROE with Nokia and the rest of its average competitors would provide betters results of and analysis. Its five-year average return on equity (ROE) of 14% for Siemens indicates better superiority about its past performance in relation to the industry average of 8%. See Table A below and see Appendix A for more details. Such a 14% return on equity definitely entices investors, as it would mean that for every 100 euros, the investors expect returns of about 14 euros. These rates could be viewed as something scarce for a company like Siemens given the present condition of the economy (Slavin, 1996) in Europe and other parts of the world which still shows very lower GDP growth as compared with the past. See also