FIN/571
Interpreting Financial Results
When analyzing a business, financial statements provide a detailed look into the company and the success or failure which lies within in. Financial ratios are calculated to determine these numbers and to identify other number related variables that have an impact on the company and those investing in the business. Once determined they offer information concerning the businesses return on investment and the ability of the business to pay its bills on time, as well as what their projected future earnings will be. The following depicts the financial status of ABC SDN. BHD with financial ratio analysis.
Financial Ratio Calculations …show more content…
Return on Investment
Calculation:
Return on Investment (ROI) = Net Income/ Stockholder’s Equity (total assets minus total liabilities)
ABC SDN.
BHD Calculation:
-0.018% = $1,881,000/ ($32,175,990 - $32,209,990) $-34,000
Explanation: A return on investment ratio measures the businesses gain in comparison to cost and determines if it is headed in a favorable financial position. ABC SDN. BHD has a ROI of -0.18% currently, which as it is does not appear to be favorable for the firm.
Current Ratio
Calculation:
Current Ratio = Current Assets/ Current Liabilities
ABC SDN. BHD Calculation:
1.43% = $29,307,990/ $20,539,890
Explanation: A current ratio is calculated in order to measure whether or not a company can successfully pay short term debt obligations. With a current ratio of 1.43%, ABC SDN.BHD has a healthy current ratio.
Assets Turnover Ratios
Total Asset Turnover
Calculation:
Total Asset Turnover = Net Sales/ Total Assets
ABC SDN.BHD Calculation:
3.78% = $121,777,000 /$32,175,990
Explanation: Asset turnover determines how much a company sells for each dollar worth of assets they own. ABC SDN.BHD has a total asset turnover ratio of 3.78%, which means they are selling 3.78% for every dollar’s worth of assets they own.
Fixed Asset
Turnover
Calculation:
Fixed Asset Turnover = Net Sales/ Net Fixed Assets
ABC SDN. BHD Calculation:
4.15% = $121,777,000/ $29,307,990 Explanation: The fixed asset turnover ratio takes into account how much sales the company generates from fixed assets and then considers depreciation.
Total Debt Ratio
Calculation:
Total Debt Ratio = Total Debt/ Total Assets
ABC SDN. BHD Calculation:
0.11% = $983,578/ $8,650,245
Explanation: The total debt ratio determines how much leverage is being utilized by the business. ABC SDN.BHD is currently using 0.11%.
Interpretation of Results
The interpretation of the financial analysis results compared against historical data allow a firm to assess the firms past performance; comparing it to current performance and projected future performance; this determines new goals and objectives that the company must strive for to increase chance of success. Conducting a benchmark on a firm is simply comparing the business with another to see where they are the same, different, and identify improvements and successes. An industry benchmark is completing the benchmark on a company within the same industry. An industry benchmark is conducted using ABC SDN. BHD financial statements in comparison to the logistics leader, Agility. Agility primarily specializes in freight forwarding, warehousing distribution, and haulage.
Return on Investment
Agility Calculation:
1.79% = $1,705,442/ ($1,784, 173 - $831, 237) $952,936
Benchmark Explanation: Return on Investment of ABC SDN. BHD is equal to -0.018%, not favorable, as compared to Agility’s ROI which comes in as a positive number at 1.79%; the higher the ROI the better the investment.
Current Ratio
Agility Calculation:
1.62% = $819,798/ $506,041
Benchmark Explanation: Current Ratio of ABC SDN. BHD is equal to 1.43%; in comparison Agility is doing a little better when considering current assets and current liabilities.
Assets Turnover Ratios
Total Asset Turnover
Agility Calculation:
0.35% = $627,174/ $1,784,173
Explanation: Total Asset Turnover Ratio of ABC SDN. BHD is equal to 3.78%; Agility’s total asset turnover ratio is much lower indicating that they own more assets proportionally to the sales that they are making.
Fixed Asset Turnover
Agility Calculation:
0.96% = $1,705,442/$1,784,173
Explanation: Fixed Asset Turnover for ABC SDN. BHD is equal to 4.15%. Agility’s net sales divided by net fixed assets determines the sales they make in comparison to their fixed assets. ABC SDN.BHD fixed asset turnover ratio is significantly higher than Agility’s.
Total Debt Ratio
Agility Calculation:
0.47% = $831,237/$1,784,173
Explanation: Total Debt Ratio for ABC SDN. BHD is equal to 0.11%; Agility comes in last in the total debt ratio once again with a higher number, displaying that the leverage used by Agility is higher than what ABC SDN.BHD is using.
In conclusion, interpreting financial results are of high importance when it comes to analyzing a business. Analyzing financial statements are beneficial to the business in several ways; net worth of the business at a specific period of time, value of assets, liabilities of the business, profit, and income. This paper has determined financial ratios of the business ABC SDN.BHD and compared them to a business that specializes in the same industry; the results were interestingly different.
References
Agility. 2014. www.agilitylogistics.com
Parrino, R., Kidwell, D. S, & Bates, T. W. (2012). Fundamentals of corporate finance (2nd ed). Hoboken, NJ: Wiley