May 16, · Financial Analysis: Financial Information. Financial ratios make it easier for quantitative analysis, where financial information is analysed by investors, as the numerous numbers contained in a company financial statement can leave them confounded May 19, · Financial statement analysis is a tool by which one can examine the publicly-available financial statements to determine the financial condition of a company. The role of the financial statements is to provide information for both internal and external stakeholders, including shareholders and regulators, about a company's finances Analysis Of Financial Statements Finance Essay Abstract. The success of an organization is portrayed through its financial position, represented by its Financial Statements. Analysis of Financial Statements is the analytical tool normally used to assess the performance of the company
The Analysis of Financial Performance: [Essay Example], words GradesFixer
Read this essay to learn about:- 1. Meaning of Financial Ratios 2. Liquidity Ratios 3. Solvency Ratios 4. Profitability Ratios 5, financial analysis essay.
Turnover Ratios 6. Ratios for Shareholders and Potential Investors 7. Coverage Ratios 8. Debt-Service Ratios 9.
Cost Ratios Calculation of Different Ratios. Financial ratios express relationship between two financial variables. For example, sales is one element of profit and loss account and profit after tax PAT is another element. Various elements of profit and loss account and balance sheet are expressed in absolute terms.
They are classified as required by the Company Law or any other relevant law under which they are prepared. For the purpose of understanding the financial characteristics like, liquidity, profitability, financial analysis essay, solvency, turnover, cost, etc. it becomes necessary to analyse the financial statements. The basic analytical tool is analysis of financial ratios, financial analysis essay.
Financial ratios may be calculated taking profit and loss account elements, which are called profit and loss ratios. They may be calculated involving two balance sheet elements, which are called balance sheet ratios or they may be calculated taking one profit and loss element and another balance sheet element, which are called mixed ratios.
For example, PAT is a profit and loss account element and Net Worth is a balance financial analysis essay element. A specific user-group needs some special ratios. A list of such user-specific ratios is given below:. In addition, financial ratios are used for specific purpose.
One such specific use is prediction of industrial sickness. Auditors also use ratios to form an opinion about the reliability of the financial statements elements, financial analysis essay. Current assets are either cash and cash equivalents or those which can be converted into cash in the short run, say one year.
Current liabilities are financial analysis essay which are payable in the short run, say one year. For the purpose of computing current ratio it is necessary to re-classify current assets and current liabilities. Current Assets mean inventories, debtors prepayments, cash and bank balances, financial analysis essay, current investments which are held financial analysis essay a short period, say not more than one year, and which are readily encashableshort-term loans and advances and advance tax.
Current Liabilities mean sundry creditors, outstanding expenses and wages, short-term secured and unsecured loans, bank overdrafts, instalments of long-term loans which are due or will be financial analysis essay within one year, tax provision and proposed dividend. Now let us use the balance sheet given above. Let us further consider certain other information:.
Let us reclassify the balance sheet elements for determining current assets and current liabilities. Generally, current ratio of 1. Current ratio of the company was 1. It has further declined to 0. A current ratio of 0. This is financial analysis essay called acid test ratio. This is so because the ratio is calculated to eliminate all possible illiquid elements from current assets as their conversion into cash in the short run is not decisive. Similarly, it excludes all current liabilities which need not be paid in the short run financial analysis essay financial arrangement.
For example, bank overdraft limit is fixed. It may not be necessary to pay for the overdraft in the short run. Similarly, if long-term fund is arranged for repayment of short-term loan or instalment of long term-loan which has fallen duesuch portion is eliminated from current liabilities. Quick ratio is considered as a true indicator of liquidity. In this case, financial analysis essay, quick ratio of the company has declined.
It becomes difficult to maintain the payment schedule with very low quick ratio. The target quick ratio is 1, financial analysis essay. The company may not be able to manage its short term payment as when fall due. It indicates whether the entity will be able to continue in the long run. It is the most popular solvency ratio.
Inclusion of debt funds on the capital structure Le. sources means committing for fixed return by way of interest, financial analysis essay. This adds to financial risk. Business profit does not always show increasing upward trend nor does it remain stable. There are ups and downs. In times of poor business profit, high interest liability poses a problem. The entity may suffer loss because of high interest liability. So the reasonableness of debt-equity ratio is always viewed from the angle of volatility in business profit.
Debt means long-term loan funds; both secured and unsecured. Equity means share capital and free reserves net of any loss and preliminary expenses and other fictitious assets. While computing debt we should eliminate current liabilities. Let us now compute debt, equity and debt-equity ratio. The debt-equity ratio of the company is well below 1. A large section of big Indian companies operate with more than 1, financial analysis essay.
Of course, the choice of debt-equity ratio depends on relative cost of debt as compared to equity. If cost of debt is lower than the rate of return the company earns, it will increase returns to the equity shareholders. share capital and free reserves net of losses and fictitious assets like preliminary expenses. Total assets, of course, exclude fictitious assets. This ratio explains the proportion of total assets financed out of proprietary funds, financial analysis essay.
Higher the ratio, lower is the dependence on outside funds — and more stable is the position of the company in the long run. Let us continue with the balance sheet and the assumptions we have made so far for computing proprietary funds ratio.
Since this ratio considers total assets and financing thereof out of proprietary funds, it is considered a guide to long-term solvency. This ratio shows how much of the total assets are financed out long-term funds.
Higher the ratio lower is the dependence on short-term funds and so better is the long- term solvency, financial analysis essay.
Sharp decline in the ratio is indicative of more dependence on short-term funds and current liabilities. At this stage, we should expand our example by adding a profit and loss account for the year ended Although the company enjoys high gross profit ratio, its financial analysis essay profit ratio is very low because of high depreciation and other indirect expenses. Operating performance is slightly better as shown by operating profit ratio because of lower indirect expenses and comparatively lower administrative cost ratio.
Gross profit ratio is down by 2. Overall profitability of the company has not been affected much because of improved operating profit ratio and higher level of other income. Return on total capital is an indicator of the efficiency of funds use. Every company should earn above the risk-free rate. Capital Employed means long-term funds consisting of both debt and equity.
Return on net worth means PAT. Let us now take data from the example to compute return on capital employed and return on net worth. Return of the company has improved in But financial analysis essay pays higher interest than its return. So despite a In this case debt has proved to be a costly financing option.
Asset based profitability ratio — Return on total asset ROTA is given by:. Outside investments could not generate comparable return. ROTA is very low whereas return on operating asset is much higher. This big gap in the earning capacity of the outside investments suggest that such investments might of strategic importance which the management want to continue despite poor return.
Of course return on operating asset remains more or less stable. There is serious decline in the asset turnover ratio meaning that sales per rupee of asset has been declined.
So return on operating asset financial analysis essay have declined unless there was decline in expense ratios. This ratio explains how quickly working capital i. gross current assets rotates.
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, time: 11:46Financial Statement Analysis Free Essay Sample
Jun 08, · Financial Statement Analysis This paper seeks to prepare a financial statement analysis of the attached income statement and the balance sheet using appropriate business/financial vocabulary with comments on significant amounts, trends, and relationships. Two given questions are answered below to accomplish the purpose of this blogger.comted Reading Time: 4 mins May 19, · Financial statement analysis is a tool by which one can examine the publicly-available financial statements to determine the financial condition of a company. The role of the financial statements is to provide information for both internal and external stakeholders, including shareholders and regulators, about a company's finances May 16, · Financial Analysis: Financial Information. Financial ratios make it easier for quantitative analysis, where financial information is analysed by investors, as the numerous numbers contained in a company financial statement can leave them confounded
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