FINANCIAL RESOURCES

Financial Resources



Financial Resources

ASSIGNMENT: 1

The interpretation of data is extremely important financial tool for each of the activities performed within the organization. The managers use various different ratios to create different policies for financing external as well as focusing on solving problems and specific issues afflicting the organizational performances. Through the interpretation of the data presented in the financial statements managers, customers, employees and suppliers of financing can account for the performance that the organization shows in the market. Apart from that, ratios can deduce various aspects of the organizational performances that cannot otherwise be determined. (Medlik & Ingram, 2000, pp 137 - 141)

Ratio analysis is a very handy tool to analyze the usefulness of the management for an overall business analysis from an internal perspective. Ratios help to quickly identify strengths and weaknesses of your company regarding its autonomy and financial independence, its performance, its solvency and liquidity. Ratio analysis is a fundamental tool of financial analysis and financial analysis itself is an important part of any business planning process. (Guilding, 2002, pp 64 - 87)

Ratio Analysis can be considered as the SWOT (strengths, weaknesses, opportunities and threats), or the basic tool of strategic analysis plays an essential role in a business planning process and no SWOT analysis would be complete without an analysis of the financial situation of enterprises. In this way Ratio Analysis is very important part of overall strategic planning activities. Financial ratio analysis will cover the profitability, efficiency, liquidity and the leverage of the organization. (Medlik & Ingram, 2000, pp 137 - 141)

Ratio Calculations

Profitability Ratios

Profitability ratios explain the performance of an organization in terms of the profit it earns. They include return on assets, return on equity, profit margin and gross margin.

Return on Assets = Net income / Total assets

Return on Assets = 3,473,000 / 41,061,000

Return on Assets = 0.084 or 8.4 %

Return on equity = Net income / Shareholders' equity

Return on equity = 3,473,000 / 29,040,000

Return on equity = 0.119 or 11.9 %

Gross profit margin = Gross income / Sales

Gross profit margin = 11,641,000 / 15,554,000

Gross profit margin = 0.748 or 74.8 %

Net profit margin = Net income / Sales

Net profit margin = 3,473,000 / 15,554,000

Net profit margin = 0.223 or 22.3 %

Efficiency Ratios

Efficiency ratios or activity ratios, explain the performance of an organization. They include inventory turnover and total asset turnover. (Guilding, 2002, pp 64 - 87)

Inventory Turnover = Cost of Goods Sold / Inventory

Inventory Turnover = 3,913,000 / 1,343,000

Inventory Turnover = 2.91 times

Total Asset Turnover = Sales / Total Assets

Total Asset Turnover = 15,554,000 / 41,061,000

Total Asset Turnover = 0.378 or 37.8 %

Liquidity Ratios

Liquidity ratios enable the organizational management to analyze their position to meet the day-to-day requirements of the organization and to pay off its short-term debts. They are working capital, current and quick ratio. (Medlik & Ingram, 2000, pp 137 - 141)

Net Working Capital = Total Current Assets - Total Current Liabilities

Net Working Capital = 2,713,000 - 2,708,000

Net Working Capital = $ 5,000

Current Ratio = Total Current ...