Evaluation of Financial Status

Kate A.
Francisco
12 – Aquinas
Entrepreneurship
Evaluation of Financial Status
Financial ratios are a method to analyze your business's productivity and enabling to
find possible difficulties. Each ratio provides information about your business's income
power, stability, effectiveness, and debt. The procedure of evaluating essential financial
records to acquire a greater comprehension of how the business is operating is known
as financial statement analysis (BDC, n.d.; Stobierski, 2020). Financial statement
analysis consists of:
1. A balance sheet is a report that shows a company's assets, liabilities, and

owners' equity at a given particular moment in time.
2. An income statement is a report that shows a company's sales, costs, and
earnings for a specified time period.
3. A cash flow statement is a report that shows how operations from the balance
sheet and income statement effect cash flow. These activities are classified as
operating, investing, and financing.
4. An annual report is a report that covers the business's transactions and financial
situations, as well as additional insights and narrative from important workers
inside the business.
Managers and other important stakeholders in a business must understand and monitor
the 13 financial performance measures. These are;
1. Gross profit margin is a profitability ratio that calculates the proportion of

revenue that remains after deducting the price of products produced.
2. Net profit margin is a profitability ratio that determines what proportion of sales
as well as other earnings remains after deducting all business expenditures such
as costs of products produced, operational costs, interest, and taxes.
3. Working capital is a measurement of a business's availability in operating
liquidity that may be utilized to support an everyday activity.
4. Current ratio is a liquidity measure that determines if a company can meet its
short-term responsibilities that are due within a year with its current assets and
liabilities.
5. Quick ratio, also termed as an acid test ratio, is another sort of liquidity ratio that
assesses a company's capacity to meet short-term responsibilities.
6. Financial leverage is the use of debt to purchase assets.
7. Debt-to-equity ratio is a solvency statistic that gauges how a business funds
itself with equity rather than debt. This ratio indicates the business’s solvency by
measuring the capacity of shareholder equity to cover all debt in the case of a
business crisis.
8. Inventory turnover is an efficiency ratio that calculates how many instances a
business’s overall inventory is sold in a given accounting period. It displays if a
business has an excessive inventory in relation to its sales levels.
9. Total asset turnover is a revenue-generating efficiency ratio that assesses how
well a business utilizes its assets to produce finances.
10. Return on equity, abbreviated as ROE, is a profitability ratio calculated by
dividing net profit by shareholders' equity. It demonstrates how successfully the
business can utilize equity capital to generate profits for investors.
11. Return on assets, or ROA, is a profitability ratio identical to ROE that is
calculated by dividing net profit by the average assets of the business. It
measures how successfully the business manages its existing assets and
resources to maximize profits.
12. Operating cash flow is a measurement of the amount of earnings a business
has as an outcome of its activities.
13. Seasonality is a measurement of how the time of year affects the financial data
and performance of a business.
Financial key performance indicators, or most commonly known as financial KPIs, are
measurements/metrics used by businesses in order to track, monitor, and evaluate their
financial condition. This is how important it is to business owners as they can minimize
the expenses of their firms as well as to responsibly utilize their finances. Attaining
greater comprehension of these metrics will allow the owners to know how their firms
are performing financially (Stobierski, 2020).
References:
BDC. (n.d.). Financial tools.
https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/financial-tools
Stobierski, T. (2020, May 05). 13 Financial Performance Measures Managers Should

Monitor. https://online.hbs.edu/blog/post/financial-performance-measures

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Kate A.

Evaluation of Financial Status

1. A balance sheet is a report that shows a company's assets, liabilities, and

1. Gross profit margin is a profitability ratio that calculates the proportion of

Stobierski, T. (2020, May 05). 13 Financial Performance Measures Managers Should

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