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FINANCIAL PERFORMANCE Analysis

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22 views11 pages

FINANCIAL PERFORMANCE Analysis

Uploaded by

im.saad.prof
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FINANCIAL PERFORMANCE

ANALYSIS
INTRODUCTION
• There are many stakeholders in a company, including trade creditors,
bondholders, investors, employees, and management.
• Each group has an interest in tracking the financial performance of a
company.
• The financial performance identifies how well a company generates revenues
and manages its assets, liabilities, and the financial interests of its
stakeholders and stockholders.
• A financial performance analysis examines the company at a specific period
in time—usually, the most recent fiscal quarter or year.
• The balance sheet, the income statement, and the cash flow statement are
three of the most significant financial statements used in performance
analysis.
FINANCIAL PERFORMANCE MEASURES
1. Gross Profit Margin
Gross profit margin is a profitability ratio that measures what percentage of
revenue is left after subtracting the cost of goods sold. The cost of goods sold
refers to the direct cost of production and does not include operating expenses,
interest, or taxes.

Gross Profit Margin = (Revenue - Cost of Sales) / Revenue * 100


2. Net Profit Margin
Net profit margin is a profitability ratio that measures what percentage
of revenue and other income is left after subtracting all costs for the
business, including costs of goods sold, operating expenses, interest,
and taxes.
Net profit margin differs from gross profit margin as a measure of
profitability for the business in general, taking into account not only the
cost of goods sold, but all other related expenses.

Net Profit Margin = Net Profit / Revenue * 100


3. Working Capital
Working capital is a measure of the business’s available operating liquidity, which
can be used to fund day-to-day operations.
Working Capital = Current Assets - Current Liabilities

4. Current Ratio
Current ratio is a liquidity ratio that helps you understand whether the business
can pay its short-term obligations—that is, obligations due within one year—
with its current assets and liabilities.

Current Ratio = Current Assets / Current Liabilities


5. Quick Ratio
• The quick ratio, also known as an acid test ratio, is another type of liquidity
ratio that measures a business’s ability to handle short-term obligations. The
quick ratio uses only highly liquid current assets, such as cash, marketable
securities, and accounts receivables, in its numerator.
Quick Ratio = (Current Assets - Inventory) / Current Liabilities

6. Leverage
Financial leverage, also known as the equity multiplier, refers to the use of debt
to buy assets. If all the assets are financed by equity, the multiplier is one. As
debt increases, the multiplier increases from one, demonstrating the leverage
impact of the debt and, ultimately, increasing the risk of the business.
Leverage = Total Assets / Total Equity
7. Debt-to-Equity Ratio
This ratio provides insight into the solvency of the business by reflecting the
ability of shareholder equity to cover all debt in the event of a business
downturn.
Debt to Equity Ratio = Total Debt / Total Equity
8. Inventory Turnover
Inventory turnover is an efficiency ratio that measures how many times per
accounting period the company sold its entire inventory.

Inventory Turnover = Cost of Sales / (Beginning Inventory + Ending Inventory /


2)
9. Total Asset Turnover
• Total asset turnover is an efficiency ratio that measures how efficiently a
company uses its assets to generate revenue. The higher the turnover ratio, the
better the performance of the company.
Total Asset Turnover = Revenue / (Beginning Total Assets + Ending Total
Assets / 2)
10. Return on Equity
• Return on equity, more commonly displayed as ROE, is a profitability ratio
measured by dividing net profit over shareholders’ equity. It indicates how well
the business can utilize equity investments to earn profit for investors.

ROE = Net Profit / (Beginning Equity + Ending Equity) / 2


11. Return on Assets
• Return on assets, or ROA, is another profitability ratio, similar to ROE, which is
measured by dividing net profit by the company’s average assets. It’s an indicator
of how well the company is managing its available resources and assets to net
higher profits.
ROA = Net Profit / (Beginning Total Assets + Ending Total Assets) / 2

12. Operating Cash Flow


• Operating cash flow is a measure of how much cash the business has as a result
of its operations. This measure could be positive, meaning cash is available to
grow operations, or negative, meaning additional financing would be required to
maintain current operations.
• The operating cash flow is usually found on the cash flow statement and can be
calculated using one of two methods: direct or indirect.
• RETURN ON INVESTMENT (ROI):
• Return on investment (ROI) is a performance measure used to evaluate the
efficiency or profitability of an investment or compare the efficiency of a
number of different investments.
• ROI tries to directly measure the amount of return on a particular investment,
relative to the investment’s cost.
• To calculate ROI, the benefit (or return) of an investment is divided by the
cost of the investment. The result is expressed as a percentage or a ratio.

• Investment cost is the cost price you paid for your investments. Your
investment cost is the 'cost value' of your investments, sometimes called
'cost basis'.
• A condensed balance sheet for Durham Corporation prepared at the end of the year 2020
appears as follows:

• ASSETS LIABILITIES & STOCKHOLDERS’ EQUITY


• Cash $55000 Notes payable (due in 6 months) $40000
• Accounts receivable $155000 Accounts payable $110000
• Inventory $270000
• Prepaid expenses $60000 Long-term liabilities $330000
• Plant &equipment $570000 Capital Stock, $5 par $300000
• Other assets $90000 Retained earnings $420000
•
• During the year the company earned gross profits of $1116000 on sales of $2790000.
Accounts Receivable, inventory, and plant assets remained almost constant in amount
throughout the year. The retained earnings opening balance is $300000.

• Required: Compute the financial performance analysis of the firm.

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