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Presented by
Amandeep kaur Vanisha
Mary Low
Business Survival:
There are two key factors for business survival: Profitability
Solvency
Mary Low
Profitability is important if the business is to generate revenue (income) in excess of the expenses incurred in operating that business. The solvency of a business is important because it looks at the ability of the business in meeting its financial obligations.
Mary Low
Mary Low
2. Solvency :
To measure the enterprise's short-term and long-term solvency.
To check firms ability to pay its obligation to creditors and other third parties in the long-term.
Mary Low
3. Liquidity :
To check firms ability to maintain positive cash flow, while satisfying immediate obligations.
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4.
Stability: The firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and nonfinancial indicators.
Mary Low
Mary Low
1. Profitability Ratios
3 elements of the profitability analysis:
Analysing on sales and trading margin focus on gross profit Analysing on the control of expenses focus on net profit Assessing the return on assets and return on equity
Mary Low
Profitability Ratios
Gross Profit % = Gross Profit * 100 Net Sales Net Profit % = Net Profit after tax * 100 Net Sales Or in some cases, firms use the net profit before tax figure. Firms have no control over tax expense as they would have over other expenses.
Net Profit % = Net Profit before tax *100 Net Sales
Return on Assets =
Net Profit Average Total Assets Net Profit Average Total Equity
* 100
Return on Equity =
*100
Mary Low
Quick Ratio = Current Assets Inventory Prepayments Current Liabilities Bank Overdraft
Mary Low
Mary Low
Inventory Turnover =
Average Collection Period = Average accounts Receivable Average daily net credit sales*
* Average daily net credit sales = net credit sales / 365
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Ratios
Long term funds management Measures the riskiness of business in terms of debt gearing.
For example: Debt/Equity This ratio measures the relationship between debt and equity. A ratio of 1 indicates that debt and equity funding are equal (i.e. there is $1 of debt to $1 of equity) whereas a ratio of 1.5 indicates that there is higher debt gearing in the business (i.e. there is $1.5 of debt to $1 of equity). This higher debt gearing is usually interpreted as bringing in more financial risk for the business particularly if the business has profitability or cash flow problems.
Mary Low
Equity ratio =
The higher the ratio, the higher the perceived quality of the earnings by the share market.
Mary Low
Dividends
Dividend payout ratio = Dividends per share *100 Earnings per share Price Earnings ratio = Market price per share Earnings per share
Mary Low
Mary Low
Mary Low
Consumer tastes
Economic factors
Limitations
1. Ignores the qualitative statements : The financial statements are concerned to the monetary matters only The qualitative elements like quality management, quality of labor, public relations are ignored while carrying out the analysis of financial statement only.
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2.
Not free from bias : In many situations, the account has to make choice out of various alternatives available, e.g. choice in the method of depreciation, choice in the method of inventory valuation etc. Since the subjectivity is inherent in personal judgment, the financial statement are therefore not free from bias.
Mary Low
3.
Since the financial statement are prepared on a ongoing concern basis as against liquidation basis.
They report only the estimated periodic results and not the true results since the true results can be ascertained only on the liquidation of the enterprise.
Mary Low
4. Ignores price level changes in the case of financial areas prepared on the historical costs :
In case of financial statements prepared on historical costs, the fixed assets are shown in balance sheet at historical costs less depreciation and not at the replacement value which often far
Mary Low
Mary Low
Mary Low
Mary Low