Financial Analysis

Financial Analysis

Profitability and Liquidity Ratios

It is important for any company to evaluate its overall profit performance in relation to the resources available. This is usually done by calculating financial ratios relating to the profit performance of the business to overall investments which is usually called as return on investment. The liquidity ratios include current ratio and the acid test ratio. The current ratio shows the short term resources of an organization. Acid test ratio is considered as more stringent test of liquidity as it excludes the least liquid portion of current assets.

Sources of Finance

When initially financing a small business, an entrepreneur will typically rely on personal savings and then attempt to gain access to the savings of family and friends. Only if these sources are inadequate will the entrepreneur men to more formal channels of financing, such as banks and outside investors.

Some sources of financing; such as hanks, business suppliers, asset-based lenders, and the government are essentially limited to providing debt financing. Equity financing for most entrepreneurs comes front personal savings and, in rare instances, from selling stock to the public. Other sources include friends and family, venture capitalists, investors, and large corporations. These sources may provide either debt or equity financing, depending on the situation. The use of these and other sources of funds is not limited to a startup or initial financing.

Dividend Policy

The dictionary meaning of 'dividend is "sum payable as interest on loan or as profit of a company to the creditors of an insolvent's estate or an individual's share of it". But in commercial usage, however, dividend is the share of the company's profit distributed among the members. So, corporate earnings and profits not retained in the business and distributed among the shareholder share known as dividend.

The term 'dividend' is also used to include distribution of the company's assets, in cash or in specie. Which remain with the liquidator alter he has realized all the assets and discharged all the liabilities, in the event of its winding up.

Following guidelines govern the distribution of profit as dividend by a company in general way: Dividend can be declared and paid only if the cash position of the company is satisfactory. Shareholder,' capital must not be utilized for the payment of dividend.

A dividend should not be paid without making an adequate provision for depreciation on fixed assets.

Capital profits may be distributed as ...