Accounting analysis techniques used in this research report are 1. Trend analysis focusing on the operating income and net profit 2. Ratio analysis on profitability, liquidity, solvency and efficiency and comparison of ratios with industry competitors. Trend Analysis: Trend analysis is used to reveal the trend of items for a certain period and is used in combination with ratio analysis to spot a particular trend, explore the causes for the trend and make necessary preparation for future projections (Vishal and Anchal, 2015). Ratio Analysis: Ratio analysis is the technique of calculating a number of accounting ratios from the figures found in the financial statements, and then compare the ratios with those of previous years or similar activities,
Financial Ratio Analysis - Definition, Purpose, Advantages, and Disadvantages Firstname Lastname Institutional Affiliation Financial Ratio Analysis - Definition, Purpose, Advantages, and Disadvantages Meaning of Financial Ratios: Financial Ratios are essential quantitative financial tools that are comprehensively used by financial experts to analyze a company’s financial performance such as business evaluation, fundamental analysis, business analysis, etc. In financial ratio analysis, an expert uses ratio to study various financial parameters from a company’s financial statements such as income statement, balance sheet etc., for efficient and effect decision making. Some of the financial ratios are listed below for
Effective Control:- Ratio analysis discloses the liquidity, solvency and profitability of the business enterprise. Such information enables management to assess the changes that have taken place over a period of time in the financial activities of the business. It helps them in discharging their managerial functions e.g., planning, organizing, directing, communicating and controlling more effectively. Limitations of Ratio Analysis Ratio analysis is a very important tool of financial analysis. But despite it’s being indispensable, the ratio analysis suffers from a number of limitations.
3. FINANCIAL RATIO ANALYSIS 3.1. PROFITABILITY (Ho, 2013) mentioned that the gross profit ratio assesses the gross profit generated per dollar sales. A drop in this ratio can signify more competition in the market, lowering selling prices or a higher cost of purchases. A rise in this ratio can signify that the firm has a competitive edge in the market and so it is able to charge higher prices for its products, or the firm is able to obtain its supplies at a lower cost.
The gross profit margin refers to the ratio that calculate the profit of a company could be earn after the costs of goods sold of the company was being paid. A higher gross profit margin would indicate the more efficiency of the company in using their raw materials. For the gross profit margin of the company, since the costs of goods sold is zero during 2014 and 2015, so there is no any changes for both of the year, which remains at 100%. This shows that Nestle (Malaysia) Berhad was able to manage their assets effectively during these two years. The return on total assets refers to the ratio that shows a company whether it can be able to manage their assets efficiently in order to earn more profits at that particular period of time.
or Ratio Analysis means one number expressed in terms of another number. It shows relationship of one figure with another figures is called as ratio analysis. For example: Current ratios. Since ratios are future-oriented, the analyst must be able to adjust the factors present in a relationship to their probable shape and size in future. Thus, in the final analysis, the usefulness of ratio is wholly dependent on their intelligent and skilful interpretation.
• Income statement The income statement reports the profit of the company during a given accounting period. Companies can determine both the gross profit and net profit from this information. Gross profit is the amount of money from the sale going to the cost of goods sold. Net income indicates what portion of sales
Financial reporting, financial statement analysis, and valuation Liquidity ratios, which focuses on cash flows, measures a company’s ability to meet its short term obligations. Liquidity measures how quickly assets are converted into cash. Liquidity ratios also measure the ability to pay off short-term obligations. In day-to-day operations, liquidity management is typically achieved through efficient use of assets. Stickney brown wahlen 6th edition 2007 Page 290-291 Current Ratio: The current ratio equals current assets divided by current liabilities.
4. Financial ratio i. Ratio Analysis Analysing an annual report of a company can be done by several method but the easiest is using mathematical ratios. Ratios are compared to "industry standards," or to ratios of similar companies. This helps determine if the company in question is faring better, worse or evenly in its category.
Hopper, Northcott and Scapens (2009), suggest that high level evaluation is done while producing cost accounting and profit analysis. Accounting is not just arithmetic in nature, accounting methods such as cash and accruals help in recognizing expenses and revenue. In order to understand the status of a firm, ratio analysis is also conducted. Ratio analysis gives a clear present position of the company and helps in the operational and financial workings. According to the writings of Weetman (2013), ratios help a firm evaluate its own performance with previous figures or with its competitors.