Imagine yourself, higher ratio will be favored by investors any day for it reflects the efficiency of a company to manage their assets by the book and generate greater amounts of net income. Also, a positive ROA ratio normally signifies an upward profit trend. ROA is helpful in comparing companies in the same industry as well, since different industries use assets in different proportions. Let’s say automobile companies use large, expensive and technical equipment, mostly hardware while software companies use computers and software’s. Return on Assets Formula: The return on assets ratio formula is calculated by dividing net income by average total assets.
In the business world, the benefits of globalization are not just limited to profit maximization, but also provide other advantages equipping business to carve a niche for itself in today’s highly competitive market. The most significant benefits of globalization on business could be increases in competitive advantage, global collaboration, foreign trade and outsourcing. One of the benefits of globalization on business is the rise in competitiveness of a business firm. Every business, in order to survive and maintain its market share, must have a competitive lead apart from other firms. An increase in competitiveness boosts the efficiency level of the business as they can produce their masterpiece goods or render services that are well known.
Maintaining financial plans enable business companies to control their cash flows and make right decisions in tough situations. Budget mostly represents an analysis of how a business company anticipates to spend cash in future period. Many business companies budget a plan for only income statement, however, it is also important to budget balance sheet for full analysis.
Satisfactory of working capital helps in maintaining the solvency of the business by giving a continuous flow of production. Enhance Goodwill Adequate working capital allows a business to be concern on making quick payments and as well as benefits in creating and preserving goodwill. When all the current liabilities and operational expenses are paid on time, the goodwill of the company will be enriched. Easy to Obtain
Oscar Gamble acts as the Corporate Controller of Shields. He estimates that the net income of the business will be lower for the current financial year. Thus, he is concerned that the upper management may implement cost reductions through laying off some employees, especially the accounting team. Moreover, Gamble also knows that amortization is one of the major expenses of the company. Presently, the company implements the “double-declining balance method” to calculate the amortization expense.
Bargaining power of input suppliers – To reduce the cost of manufacturing, cost of input material and labor should be reduced. Various techniques can be used to reduce the cost of labor and input material. Every organization has both long term and short term goals. Balanced scorecard focuses on long term goals along with the short term goals. Short term goals generally focus on the financial targets such as quarterly earnings while long term goals on the product’s overall quality, customer satisfaction etc.
3. Introduction to Financial Ratios Financial ratios are dealings determined from a firm's financial information and used for comparison purposes in financial means. Some of the financial ratios are Profitability ratios, Liquid ratios, Capital structure ratios, Assets management ratios and Market value ratios. Sub-categories of these ratios are defined below. 3.1 Profitability Ratios A category of financial metrics used to evaluate a business's ability to generate profit as compared to its expenses and other relevant costs earned during a specific period of time.
Normally the management of cash is based on cash conversion cycle and is considered as essential factors improving the performance of companies, since it shows how efficient a firm while making payments of its bills, collection of receivables, and selling of stock. Organizations can increase their profitability by minimizing their length of cash conversion cycle through minimizing or reducing the receivables collection time period, minimizing or reducing the stock selling time period and increasing or extending the credit payment time period. Since every business organization is particularly focused about how to maintain and improve profitability, hence they have to keep keen eye on the factors impacting the profitability. In this aspect, liquidity management having its effects on returns and risks of the business organizations cannot be neglected by these organizations and so that cash conversion cycle being the sign of the liquidity management needs to be investigated as to how it may affect the profitability of the business
Depreciation is the loss in value of an asset over time until the value becomes zero or negligible. A company can deduct the cost of the fixed assets by making sure they are in compliance with the relevant tax laws. When a company makes large purchases, they will record the items as assets. Examples of fixed assets are buildings, computers, and furniture or in the construction industry machinery etc. The only asset that cannot be depreciated is Land.
4- You have theoretically write about the tools used in financial statement analysis. Operating Income to Net Sales Ratio Operating Income = Operating Income to Net Sales Ratio Net Sales Operating Income to Net Sales ratio depicts the profitability of the sales resulting from the regular business operations including buying, selling and other operations. Gross Profit on Net Sales Gross Profit on Net Sales seeks to establish whether the firms’ markup goods cover the company expenses and therefore, whether the firm gets profit. The ratio also reveals whether the gross profit rate is continually lower than the average margin. Current Ratio = Current Assets Current Liabilities Mainly, the current ratio measures the ability of a company to meet short term obligations using short term.