Finance and Business



Finance and Business

Financial Performance

Financial ratio analysis not only helps gauge a firm's performance, it also helps decision making for investors and creditors. Financial performance refers to the methodical evaluation of the financial situation of an organization, person or a project. Several methods of financial analysis exist; however, ratio analysis is considered the most efficient in determining the financial position and performance of an organization. Financial Ratios are one of the most important and commonly used tools for the financial analysis of a company. It helps analyst to study the performance of the company in comparison with the industry. Sometimes it is difficult to conclude results from just financial statements (Income Statement, Balance Sheet and Cash flow), hence, financial ratios help analyst determine the strength of the company. The financial performance that follows is evaluated and analyzed from the perspective of investor or shareholder. However, financial ratios offer assistance to many stakeholders including Banks, Creditors, Government and Investors. I shall analyze my business and compare the performance with the competitors and industry based on these ratios.

Profitability Ratios

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

Efficiency Ratios

Efficiency ratios or activity ratios, explain the performance of an organization. They include inventory turnover and total asset turnover. It calculates the time in which company receives its receivable and turns its inventory to sales. These ratios are also very important as it determines the aspects the company needs to work on; it establishes the overall performance of the company. It includes ratios like Inventory Turnover, Account Receivable Turnover and Total Asset Turnover.

Liquidity Ratios

Liquidity ratios enable the organizational management to analyze their position to meet the day-to-day requirements and the ability to pay off its short-term debts. These include net working capital, current ratio and quick ratio. It is important for company to maintain good liquidity position in order to present a strong picture to creditors and shareholders. It is suggested that company at least maintains a Current Ratio of greater than 1.

Gearing Ratios

Gearing, also termed as leverage, portrays the organizational financing policies. It reflects the way an organization raises funds for investments and other organizational purposes. Gearing ratios includes debt to assets ratio and debt to equity ratio. These ratios are very important for creditors as these ratios determines the risk, the company is facing. If the debt level is very high, the company could be very risky as the company would have to pay principal and interest payment on the debt.

Debt Financing

Debt financing is obtaining a loan through a bank or non-bank financial institutions, it is in the form of loans or issue bonds into the capital. Debt financing can be further subdivided into two modes of direct debt financing and indirect debt financing. Debt financing is accompanied with obligatory repayments at the end of interim, depending upon the conditions of ...