Lynn University Analysis Of Financial Position

Financial analysis Lynn University Analysis of financial position is the assessment of stability, viability, and profitability of a project or business. It is performed using ratios and used in making decisions by top management. The information from the analysis helps the management make decisions regarding investment, lending, and issuance of stocks, purchases, continuation, and discontinuation. The goals of performing financial analysis are to asses profitability, solvency, liquidity, and stability. Profitability is the ability to generate income and sustain growth in the short term and long term. A solvent organization can pay its obligations and others in the long term. A liquid company can maintain positive cash flow and also meet its
immediate obligations. A stable company can maintain itself in business for a long time in future (Coyle, 2010). Financial ratios are used to perform financial analysis. A financial ratio is a qualified scale of two selected financial numerical taken from an organizations financial statement. The market share of an organization in the market can be used to calculate the ratios. If a company is traded in the stock exchange market, it could be easier to do so. They are expressed as decimals or percentages (Coyle, 2010). Profitability ratio It measures ability to generate adequate income to sustain growth. The use of assets and control of expenses in company, income generation is used. An acceptable rate of return is expected. Profitability ratios include gross margin, operating margin, and return on equity, profit margin, return on assets and return on capital (King 2007). Gross margin QUOTE OR QUOTE It enables the determination of profit before deductions such as taxation and paying of employees. Operating margin QUOTE It is used when a firm does not have operating income. Shows earnings before taxation and paying interest. Profit margin QUOTE It establishes the excess of accumulated profits over the net sales. A positive figure shows that the enterprise made income over the buying price of the goods of services. Return on capital QUOTE It enables the determination of the money generated over and above the assets invested. Liquidity ratios They determine the availability of cash and finances to pay off debtors in the short term. A companys most liquid assets are compared and how first then can be compared to cash. The greater the liquid assets, the higher the chances of paying off emerging debtors. Such a company can easily meet its running obligations and operations. Less liquid assets mean that a red flag has to be raised. Investors need to increase liquidity f such a company. It includes current ratio, acid test ratio, cash ratio and operation cash flow (King, 2007). Current ratio QUOTE It aims to establish the excess of current assets over current liabilities. The ratio establishes the short term success of a business entity. Acid-test ratio (Quick ratio) QUOTE Cash ratio QUOTE Operation cash flow QUOTE Activity ratio It aims to determine the ability of an enterprise to convert the revenue in its balance sheet into real revenue. They also assess the effectiveness of a company in generating revenue in hard cash form. The cash should be based on capital and assess. The ratios are critical in evaluation of the fundamentals of a company. They also express how well a company has been generating income. Moreover, they are a vital indicator of the potential of the management of a company. The ratios include average collection period, degree of operating leverage and DSO (McGee 2008). Average collection period QUOTE Degree of operating leverage (DOL) QUOTE DSO QUOTE Determination of a companys cost of capital The capital cost refers to the cost of the funds of a company in both equity and debt. The cost of capital can be determined using three vital steps Cost of capital components, the cost of individual components is determined. They include the capital debt and equity capital. The debt capital is equivalent o imputed interest on the debts of the company. Equity capital indicates the utilization of opportunities by the company for the investors to earn returns on their investment. It can also be achieved using the Capital Asset Pricing Model (CAPM). The model claims that shareholders on any company demand a minimum return on their investment. The environment they operate in should be free of risks plus their being returns for any extra risk taken. An extra risk is terms as equity risk premium. A Multiplier known as beta is employed in determining how risky a security is relative to the entire market. The capital structure. It entails calculation the proportion contributed by equity and debts. It indicates the minimum returns expected by investors. Weighing in the components. Each component is measured to determine the individual contribution to the whole capital structure. The answer is the average cost of the capital (WACC). The economic value of accompany is determined by a number of factors. It also changes with the prevailing economic situations including depreciation, inflation and depression (McGee 2008). References HYPERLINK http//www.bibme.org/ o Edit this itemCoyle, B. (2010). Cash flow forecasting and liquidity. Chicago Glenlake Pub. Co. HYPERLINK http//www.bibme.org/ o Edit this itemKing, W. T. (2007). The Stock Exchange. London Pub. for the Council of the Stock Exchange by G.Allen Unwin. HYPERLINK http//www.bibme.org/ o Edit this itemMcGee, R. W. (2008). 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