Financial Analysis
FINANCIAL ANALYSIS:
Understanding financial performance using the technique of ratio analysis of listed companies
Executive Summary
Companies are said to be listed (quoted) when their shares are publicly traded on a stock exchange. A systematic use of ratios is widely used by managers, creditors, regulators and investors to analyze the financial performance of listed and unlisted companies. The listed companies have an extra ratio analysis (investor ratios) which cannot be used in the unlisted companies simply because their shares are not listed on the stock market.
A ratio is a relationship between two numbers. The objective in using a ratio when analyzing financial a company’s performance is to standardize analyzed information so that ratios of different or same firms can be compared. Financial ratios provide the basis for answering some very important questions concerning the performance of a firm financially and its overall well being. (Petty et al., 2000). A brief summary of the main financial ratios and how they are used is given below: Ratio Comments
1 Profitability ratios: Gross profit, Net profit, Return on Capital Employed - Is the business able to control its production or overhead costs?
2 Efficiency ratios - How efficiently is the business employing resources invested in fixed assets and working capital?
3 Liquidity ratios: Current, quick ratio - How capable is the business in meeting its short-term obligations as they fall due?
4 Stability ratios: eg. Gearing - How healthy is the business in the long-term financially?
5 Investor ratios: EPS, Price earning ratio, Dividend yield - Are the investors receiving sufficient return on their investment?
Critical evaluation of the financial ratios
Ratio analysis used with care, can reveal much about a company and its overall operations and image to stakeholders but there are things to bear in mind:
- A ratio has no single correct value. The observation of a too high
Understanding financial performance using the technique of ratio analysis of listed companies
Executive Summary
Companies are said to be listed (quoted) when their shares are publicly traded on a stock exchange. A systematic use of ratios is widely used by managers, creditors, regulators and investors to analyze the financial performance of listed and unlisted companies. The listed companies have an extra ratio analysis (investor ratios) which cannot be used in the unlisted companies simply because their shares are not listed on the stock market.
A ratio is a relationship between two numbers. The objective in using a ratio when analyzing financial a company’s performance is to standardize analyzed information so that ratios of different or same firms can be compared. Financial ratios provide the basis for answering some very important questions concerning the performance of a firm financially and its overall well being. (Petty et al., 2000). A brief summary of the main financial ratios and how they are used is given below: Ratio Comments
1 Profitability ratios: Gross profit, Net profit, Return on Capital Employed - Is the business able to control its production or overhead costs?
2 Efficiency ratios - How efficiently is the business employing resources invested in fixed assets and working capital?
3 Liquidity ratios: Current, quick ratio - How capable is the business in meeting its short-term obligations as they fall due?
4 Stability ratios: eg. Gearing - How healthy is the business in the long-term financially?
5 Investor ratios: EPS, Price earning ratio, Dividend yield - Are the investors receiving sufficient return on their investment?
Critical evaluation of the financial ratios
Ratio analysis used with care, can reveal much about a company and its overall operations and image to stakeholders but there are things to bear in mind:
- A ratio has no single correct value. The observation of a too high
References: Books 1. Steve Lumby and Chris Jones, 2003; Corporate Finance – theory and practice 7th edition 2. Glautier M. W. E and Underdown B, 2001; Accounting Theory and Practice 7th edition 3. Lucey Terry 2003; Management Accounting 4. Weetman Pauline, 2011; Financial and Management Accounting – An introduction. 5th edition 5. Cunningham Billie M, Loren A. Nikolai and John D. Bazley (2000): Accounting information for business decisions 6. Petty J. William, Peacock Rolffe, Martin Peter, Burrow Michael, Keown Arthur J, Scott Jr David F, Martin John D (2000): Financial Management 2nd edition 7. Higgins Robert C. (2000); Analysis for Financial Management 6th edition Online sources 1. (Biz/ed, free online services for students, teachers and lecturers of business, economics, accounting, leisure and recreation and travel and tourism, www.bized.co.uk) accessed on 05/10/2012