MBA PROGRAMME STMWEC Page 31 IMPORTANCE OF RATIO ANALYSIS The importance of ratio analysis lies in the fact that it presents facts on a comparative basis and enables the drawing of inferences regarding the performance of the firm ratio analysis is relevant in assessing the performance of a firm in respect of the following points. 1. Liquidity positions: With the help of ratio analysis conclusions can be drawn regarding the liquidity position of the firms. The liquidity position of a firm would be satisfactory if it is able to meet its current obligations when they become due the liquidity ratios are particularly useful in credit analysis by banks and other supplier of short–term loans. 2.
It also shows how well a company is managing its liabilities. There are several ratios calculated under these, including asset turnover ratio, average collection period, and inventory turnover ratio (Ormiston & Fraser, 2016). Profitability ratios measure the extent to which a company is able to make profit. It shows whether a business is performing well over a certain period of time (Melicher, 2013). There are several ratios types of profitability ratios, such as net profit margin, operating profit margin, gross profit margin, cash flow margin, return on assets, return on equity, and payout ratios.
Solvency Ratios This ratio used to measure the company’s ability to pay its debt indicates The lower a company's solvency ratio, the greater the probability that it will default on its debt obligations. • Debt to Equity = Total debt Total equity AVON= -4.5 ULTA= .65 REVLON= -5.9 This ratio represent the financial efficiency being used by the company and including both short term and long term debt. A Debt to Equity ratio of 2 indicates that the company gets two-thirds of its capital financing from debt and one-third from shareholder equity, so it borrows twice funding as it owns, this ratio as benchmark shouldn’t be more than 2 to avoid higher interest expense, and in some cases could affect the company credit score. • Debt to assets = Total debt Total assets This ratio indicate that the company gets all its capital finance from debt with negative equity This ratio is comparing between the total debt and the total assets to show the company’s ability to cover its debt using its assets, ratio greater than 1 shows that a big portion of debt is funded by assets, which means, the company has more liabilities than assets AVON= = 1.12 ULTA= .39 REVLON= 1.2 Avon products company has debt more than its
These ratios are calculated by using the formula we gave you earlier to determine the costs and benefits of the training conducted. Here are some examples of typical measurements that could be used to convert the benefits of training to a rand value. Once these benefits have been converted to a rand value, the ROI formula is used to calculate the return on the training investment. ROI is presented as a percentage, for instance 87%, which means that the training added value to the organisation. STEP 9: EVALUATE TRAINING IMPACT Evaluating the impact of training means deciding how the organisation can use the results of the ROI calculations.
Financial ratios: a percent, rate, or proportion that expresses a mathematical relationship between two financial quantities Liquidity ratios: evaluates how quickly a company can convert short-term assets and liabilities into cash Current ratio: evaluates a company’s ability to pay its short-term debt (current liabilities) Comparing financial data: examining financial data from multiple years to see trend lines for key measures such as net income, revenues, cost of goods sold, operating expenses, and gross margin Acid-test ratio: a more conservative liquidity ratio that evaluates how quickly cash, short-term investments, and accounts receivable can be converted into cash Inventory turnover: how long a company holds onto its services or products (inventory) Profitability ratios: measurements which reflect a company’s ability to use its assets efficiently to produce profits Return on sales/profit margin: provides insight into how efficiently and profitably a company is being run, determined by dividing net income after taxes by net sales Ratio analysis: using comparisons to gather information and see trends Basic earnings per
Net present value has the component of discount rate in which can determine the expected rates of returns by identifying costs related to financing the investment. The method of valuation is calculated by discounting future net cash flows from the investment of the projects required rate of return. The initial amount of the investment and then subtracted in the calculation. The formula is expressed below: The internal rate of return (IRR) is a vital resource within the capital budgeting process as it is an important phase in the evaluation scope. The internal rate of return is used in the assessment of potential investment profitability.
ROA, is a financial ration that shows the company ability to generate profit out the used asset. Murniati (2016) found the higher the ROA of a company, the higher the value of the company 's assets and lead to higher stock prices as much in demand by investors. ROE, measures the ability of a company to generate profit on a certain equity. Although, there is no clear link between ROE and stock prices, Rotblut (2013) believe that it works effectively when combined with other indicators. He explained that ROE provide a quantitative measurement of management 's effectiveness at generating profits from a company 's net assets which lead to better trust on the company capability to generate profit and consequently higher demand on its share.
Earning Per Share is calculated based on historical cost which may not be a reliable measure as Earning Per Share need to increase by at least the rate of inflation if the company is to maintain its existing operational capability. Return on Capital Employed does not account for the depreciation and amortization of the capital employed as capital employed is in the denominator. The company’s assets are depreciated the Return on Capital Employed will increase without an increase in
On the other hand, quantitative and qualitative are also part of ratio analysis as they help businesses by getting a complete outline of their business. Quantitative is mainly facts and figures whereas qualitative is opinions and views. Profitability ratio is when it measures how much a business generates profit through its activities. In this ratio, there are three main ratios which are used to measure the success of a business. The three ratios are; 1.
Equity: It is what the business owes to its owners. Equity equals to total assets minus total liabilities thus it represents the leftover interest in the business that belongs to the owners. In simple terms, equity is the financial value, or worth, of a company. For examples, Share capital represents the amount invested by the owners. Retained Earnings means part of the income is retained by the company instead of distributing to the shareholder as dividends.