Hartford Case Study

Answer 1:

Ratio analysis can reveal most of the information about the company when it is used effectively.

Strengths of ratio analysis:

Ratio analysis can be very helpful when the values are compared against previous years, other companies, industry averages. These comparisons help an analyst to identify company’s strengths and weaknesses and evaluate its financial position and also anticipate the risks that may appear in the future.

Using ratios a financial analyst can implement plans to improve profitability, liquidity, gearing problems and market value of the business. Although ratios report on past performances, they can be used for predictive purposes to catch potential problems. It is possible to verdict if the company has enough liquidity to pay its future debts or even tell whether its shareholders will be happy.

Weaknesses of ratio analysis:

Not all financial ratios can be compared. There are several points that analyst must take into account. When two companies' financial data is compared, the ratios must reflect comparable price levels and these values must be evaluated using same accounting methods and valuation bases.

Comparing ratios with past data of the same company (trend analysis) can indicate the performance over years and highlight points that need for action, however it will not be enough to tell much about the company’s status among competitors. For more informative analysis, ratios should be compared with two or more companies in similar line of business (cross-sectional analysis). More reasonable method would be comparing ratios to industry averages.

There is no single or correct value for a ratio. The value may be too low or too high against to reference value. Ratios may mislead when they are not combined with company’s management and economic circumstances. Analyst must consider company’s products, competitors and also the company’s vision for the future.

In the trend analysis although 2 years comparison can give the idea about...