Financial statements Analysis:
financial statements provide some extremely useful information to the extent
that the balance sheet mirrors the financial position on a particular date in
terms of the structure of assets, liabilities and owners’ equity, and so on and
the profit an loss account shows the results of operations during a certain
period of time in terms of the revenues obtained and the cost incurred during
the year. Thus, the financial statements provide a summarized view of the
financial position and operations of a firm. Therefore, much can be learnt
about a firm from a careful examination of its financial statements as
invaluable documents performance reports. The analysis of financial statements
is thus, an important aid to financial analysis.
The focus of financial
analysis is on key figures in the financial statements and the significant
relationship that exists between them. The analysis of financial statements is
a process of evaluating the relationship between component parts of financial
statements to obtain a better understanding of the firm’s position and
performance. The first task of the financial analyst is to select the
information relevant to the decision under consideration from the total
information contained in the financial statements. The second step is to
arrange the information in a way to highlight significant relationships. The
final step is interpretation and drawing of inferences and conclusion. In
brief, the financial analysis is the process of selection, relation and
Ratio analysis is a
widely-use tool of financial analysis. It can be used to compare the risk and
return relationships of firms of different sizes. It is defined as the
systematic use of ratio to interpret the financial statements so that the
strengths and weakness of a firm as well as its historical performance and
current financial condition can be determined. The term ratio refers to the
numerical or quantitative relationship between two items and variables. These
ratios are expressed as (i) percentages, (ii) fraction and (iii) proportion of
numbers. These alternative methods of expressing items which are related to
each other are, for purposes of financial analysis, referred to as ratio
analysis. It should be noted that computing the ratios does not add any
information not already inherent in the above figures of profits and sales.
What the ratio do is that they reveal the relationship in a more meaningful way
so as to enable equity investors, management and lenders make better investment
and credit decisions.
TYPES OF RATIOS:
The importance of
adequate liquidity in the sense of the ability of a firm to meet
current/short-term obligations when they become due for payment can hardly be
over stresses. In fact, liquidity is a prerequisite for the very survival of a
firm. The short-term creditors of the firm are interested in the short-term
solvency or liquidity of a firm. The short-term creditors of the firm are
interested in the short-term solvency or liquidity of a firm. But liquidity
implies from the viewpoint of utilization of the funds of the firm that funds
are idle or they earn very little. A proper balance between the two
contradictory requirements, that is, liquidity and profitability, is required
for efficient financial management. The liquidity ratios measure the ability of
a firm to meet its short-term obligations and reflect the short-term financial
strength and solvency of a firm.
ratio is the ratio of total current assets to total current liabilities. It is
calculated by dividing current assets by current liabilities:
Current Ratio =
The current assets of
a firm, as already stated, represent those assets which can be, in the ordinary
course of business, converted into cash within a short period of time, normally
not exceeding one year and include cash and bank balances, marketable
securities, inventory of raw materials, semi-finished (work-in-progress) and
finished goods, debtors net of provision for bad and doubtful debts, bills
receivable and prepaid expenses. The current liabilities defined as liabilities
which are short-term maturing obligations to be met, as originally
contemplated, within a year, consist of trade creditors, bills payable, bank
credit, and provision for taxation, dividends payable and outstanding expenses.
The liquidity ratio is
a measure of liquidity designed to overcome this defect of the current ratio.
It is often referred to as quick ratio because it is a measurement of a firm’s
ability to convert its current assets quickly into cash in order to meet its
current liabilities. Thus, it is a measure of quick or acid liquidity.
The acid-test ratio is
the ratio between quick assets and current liabilities and is calculated by
dividing the quick assets by the current liabilities.
Quick Ratio =
The term quick assets
refers to current assets which can be converted into cash immediately or at a
short notice without diminution of value. Included in this category of current
assets are (i) cash a bank balance; (ii) short-term marketable securities and
(iii) debtors/receivables. Thus, the current which are included are: prepaid
expenses and inventory. The exclusion of expenses by their very nature is not
available to pay off current debts. They merely reduce the amount of cash
required in one period because of payment in a prior period.
Inventory Turnover Ratio:
This ratio indicates
the number of times inventory is replaced during the year. It measures the
relationship between the cost of goods sold and the inventory level. The ratio
can be computed in
of goods sold
Inventory Turnover Ratio =
The average inventory figure may be of
two types. In the first place, it may be the monthly inventory average. The
monthly average can be found by adding the opening inventory of each month
from, in case of the accounting year being a calendar year, January through
January an dividing the total by thirteen. If the firm’s accounting year is
other than a calendar year, say a financial year, (April and March), the
average level of inventory can be computed by adding the opening inventory of
each month from April through April and dividing the total by thirteen. This
approach has the advantage of being free from bias as it smoothens out the
fluctuations in inventory level at different periods. This is particularly true
of firms in seasonal industries. However, a serious limitation of this approach
is that detailed month-wise information may present practical problems of
collection for the analyst. Therefore, average inventory may be obtained by
using another basis, namely, the average of the opening inventory may be
obtained by using another basis, namely the average of the opening inventory
and the closing inventory.
Working Capital Turnover Ratio:
This ratio, should the
number of times the working capital results in sales. In other words, this
ratio indicates the efficiency or otherwise in the utilization of short tern
funds in making sales. Working capital means the excess of current over the
current liabilities. In fact, in the short run, it is the current liabilities
which play a major role. A careful handling of the short term assets and funds
will mean a reduction in the amount of capital employed, thereby improving
turnover. The following formula is used to measure this ratio:
Working capital turnover ratio = _____________________
Fixed Assets Turnover Ratio:
As the organization
employs capital on fixed assets for the purpose of equipping itself with the
required manufacturing facilities to produce goods and services which are
saleable to the customers to earn revenue, it is necessary to measure the
degree of success achieved in this bearing. This ratio expresses the
relationship between cost of goods sold or sales and fixed assets. The
following is used for measurement of the ratio.
Fixed Assets Turnover =
Net fixed assets
In computing fixed
assets turnover ratio, fixed assets are generally taken at written down value
at the end of the year. However, there is no rigidity about it. It may be taken
at the original cost or at the present market value depending on the object of
comparison. In fact, the ratio will have automatic improvement if the written
down value is used.
It would be better if
the ratio is worked out on the basis of the original cost of fixed assets. We
will take fixed assets at cost less depreciation while working this ratio.
Debt to Equity Ratio
between borrowed funds and owner’s capital is a popular measure of the
long-term financial solvency of a firm. The relationship is shown by the
debt-equity ratios. This ratio reflects the relative claims of creditors and
shareholders against the assets of the firm. The relationship between
outsiders’ claims and owner’s capital can be shown in different ways and,
accordingly, there are many variants of the debt-equity ratio.
Debt to Equity Ratio =
ratio is, thus, the ratio of total outside liabilities to owners’ total funds.
In other words, it is the ratio of the amount invested by the owners of
Comparative Balance sheet:
sheets as on two or more different dates can be used for comparing assets,
liabilities, capital and finding out any increase or decrease in those items.
In the words of Foulke “comparative balance sheet analysis is the study of the
trend of the same items, group of items and computed items in two or more
balance sheets of the same business enterprise on different dates”. Such
analysis often yields valuable information as regards progress of business
concern. While the single balance sheet represent balances of accounts drawn at
the end of an accounting period, the comparative balance sheet represent not
nearly the balance of accounts drawn on two different dates, but also the
extent of their increase or decrease between these two dates. The single
balance sheet focuses on the financial status of the concern as on a particular
date, the comparative balance sheet focuses on the changes that have taken
place in one accounting period. The changes are the direct outcome of
operational activities, conversion of assets, liability and capital form into
others as well as a various interactions among assets, liability and capital.
Tips to improve your financial health.
Author: Bill Hudley
Spend less money, or
save more money or do both. If the annual income does nothing more than remain
constant, your financial condition will improve.
The above statement may sound come
across as flippant, but it’s a fact of life, regardless. Needless to say we all
have different personalities and different responses to needs and desires in
A very important yardstick, in my view,
is the growth rate of personal assets. If you sit down to all of the savings
accounts, investment accounts and properly values and the total value is
greater than the same time of the previous year, it stands to improve that the
financial health intact and possibly improved.
Steps to Improve Financial Performance
Author: Terry Peltes
Given the challenges
facing physicians, successful practices must take proactive steps to combat
negative trends and improve their overall financial performance.
To improve practice operations,
processes can be streamlined to reduce costs; productivity improvements can be
implemented by physicians and employees to increase revenue; a reporting
structure can be created that allows for better decision making by physicians
and employees; and a rewards system can be implemented to recognize
To determine how you can improve your
medical practice’s performance, consider the following management procedures.
1) Internal Cost Reduction Strategies
reduction strategies focus on reducing the internal costs generated by medical
services provided to the marketplace.
2) External Cost Reduction Strategies
strategies include the cost of services purchased from outside consultants or
3) Asset and Credit Management
ensure that you are getting the most value from the resources invested in your
4) Personnel Resources
managed properly, personnel costs and productivity can have a substantial
impact on practice profitability.
5) Management Reporting
use of timely, relevant, properly formatted reports to manage your practice
cannot be overstated. This is a crucial link between setting financial and
operational goals and managing the practice to achieve them.
6) Revenue Enhancement
Physicians can improve
their financial performance by improving their ability to negotiate favorable
managed care contracts and reducing practice expenses as a percentage of
Excellence in Financial Management
Author: Matt H. Evans
Ratio analysis can be
used to determine the time required to pay accounts payable invoices.
If the average number of days is close to the average credit terms, this may
indicate aggressive working capital management; i.e. using spontaneous sources
of financing. However, if the number of days is well beyond the average credit
terms, this could indicate difficulty in making payments to creditors.
Analyze Investments Quickly With Ratios
The information you
need to calculate ratios is easy to come by: Every single number or figure you
need can be found in a company’s financial statements. Once you have the raw
data, you can plug in right into your financial analysis and put those numbers
to work for you.
Everyone wants an edge in investing but
one of the best tools out there frequently is frequently misunderstood and
avoided by new investors. When you understand what ratios tell you, as well as
where to find all the information you need to compute them, there’s no reason
why you shouldn’t be able to make the numbers work in your favor.