Certified Financial Management Specialist Practice Exam

What financial analysis method involves the use of ratios to evaluate a company's performance?

1. Cost-Benefit Analysis

2. Ratio Analysis

3. Trend Analysis

4. Variance Analysis

The correct answer is: Ratio Analysis

The financial analysis method that involves the use of ratios to evaluate a company's performance is fundamentally known as Ratio Analysis. This technique allows analysts to assess various aspects of a company's financial health and operational efficiency by comparing line items in the financial statements, such as the balance sheet and income statement. By calculating ratios such as the current ratio, debt-to-equity ratio, return on equity, and profit margins, one can derive insights into liquidity, solvency, profitability, and operational efficiency. Ratio Analysis is widely utilized due to its ability to facilitate comparisons over time (trend analysis) and against industry benchmarks, helping stakeholders make informed decisions. It also simplifies complex financial data into standardized figures that can be easily interpreted. In contrast, while cost-benefit analysis, trend analysis, and variance analysis serve various purposes in financial evaluation, they do not center predominantly on the computational analysis of performance through ratios. Instead, they focus on different aspects like cost evaluation versus benefit, observing financial data over time, and comparing actual outcomes against budgeted figures, respectively.