The goal of the financial analysis is to evaluate the operation of the company on the basis of strategy of the company, its economic and industrial atmosphere competitive and its strategy of accountancy. Alexander and others (2005).
There are many techniques of the financial analysis. The rather known technique is analysis of ratio. In this article we will use the same technique to evaluate the operation of the MG Fabrications plc. The declaration of the understanding income shows that the three years figures 2008, 2009 and 2010 respectively
FINANCIAL RATIO ANALYSES
The operation of the company are measurements on the basis of their financial position; if the company makes benefit or not, it has enough manpower to produce and who checks his progress on the basis of high ratio or under benefit. The rather known technique to measure the operation of the company which it negotiates public is the analysis of ratio, in which the elements of the account profits and losses of the ant of the assessment put in report/ratio one at at the other which help to judge the effectiveness of the management and the behavior of the investors.
There are four groups of the financial quotients in order to analyze the operation of the signature considering, which they include:
Profitability ratios
Investment ratios
Liquidity ratios
Efficiency ratios
PROFITABILITY RATIO:
Profitability ratio measure operation and the totals effectiveness of the company. It shows how the company uses its credits and controls its costs to produce the index of the acceptable return. Some of the ratio more general use of what is beneficial are as follows it follows:
Gross Profit Margin
Net Profit Margin
Return on Capital Employed (ROCE)
Return on Equity
Expense to Sales Ratio
Gross Profit Margin
Gross profit margin, expressed in percentage, measures the gross profit in relation to net sales. Net sales means total sales minus sales return and gross profit is the difference between net sales and cost of goods sold.
Formula
Gross profit
_______________ X 100
Sales
Calculation
2008
2009
2010
65529
________ x 100 = 19.9%
327646
86007
_______ x 100 = 16.66%
516042
106485
_______ x 100 = 14.94%
712629
The comment that
The alleviation of quotient of crude profit from the 19.9% 2008 until 14.9% in2010 shows the insufficiency of administration produces the MG Fabrications so that is improved the volume of sales and so that it is profited. It can be that it had two reasons, in the first instance it is the alleviation of price of sale of goods without an alleviation of cost virtuous or increase of cost of goods but it is increase of price of sale.
Net Profit Margin
The proportion of net profit that is expressed in the percentage measures the efficiency of enterprise in the clean sales after it removes the taxes
Formula
Net profit
___________ X 100
Sales
Calculation
2008
2009
2010
32765 x 100 = 10%
327646
45051
_______ x 100 = 8.73%
516042
50072
________ x 100 = 7.02%
712629
The comment that:
The profit of course produces the MG Fabrication minimizes each year that shows the disability of administration in the extension a satisfactory return in relate in you investments and sales.
Return on Capital Employed :
The return in comprehensible used them (ROCE) and expressed in the percentage and it measured the possibility in the enterprise are produced the returns comprehensible them. It establishes the relation between the profit of enterprise and used you occupy them.
Formula
Net profit before interest and tax
__________________________________ X 100
Capital Employed
Calculation
2008
2009
2010
32765
_______ x 100 = 45.09%
72661
45051
________ x 100 = 50.3%
89440
50072 + 7266
_____________ x 100
111240
57338
_______ x 100 = 51.5%
111240
Note:
According formula I calculate in 2010 net profit before tax but given in statement less amount from net profit value but I need before tax and interest, tax or interest add in net value .
The comment that:
The critic of that one is compared with the net benefit to the bottoms of order as of the year, 2008 that year 2010 releases to imagine of the increase in benefit margins of the A. - to invent. They have used to the management in the investment of the owner, and the creditor in the business in an effective one and, therefore, the benefit of the company has improved.
Return on Equity:
Return on equity, expressed in percentage, shows the relationship between company's profit and its equity. Thus the performance of the company is measured by the return on equity capital.
Formula
Net profit before tax
______________________ X 100
Equity
Calculation
2008
2009
2010
32765
_______ x 100 = 45.09%
72661
45051
_______ x 100 = 50.03%
89440
57338
_______ x 100 = 51.54% 111240
The comment that:
Compared values 2008 to 2010 organization on the basis of the return on equity ratio grow as profitable stage.
Expenses to Sales Ratio:
Expenses to the relationship of know it, also expressed in the percentage, extension the relationship between expenses and know them the net. Measure the profit of the company in connection with relative expenses know it.
Formula
Expenses
_____________ X 100
Sales
Calculation
2008
2009
2010
32765
_______ x 100 = 10%
327646
40956
________ x 100 = 7.9
516042
49147
_______ x 100 = 6.8%
712629
The comment that:
The line is efficiently however not in second place the thing in the waiting period, because the costs drastic descend.
Investment Ratio
The ratio of the investment measure the relationship between owns capital funds and the interest of the investor in the trade. In addition it admits like the gearing ratio this says, whom it steers the trade of the owners or expropriated (the investor). If palancada one of the company are higher it, it regards, around dangers to take and it is uncertain for the investment. The rich ratio, which admits to the gearing ratio, is debit item for the ratio of the impartiality.
Debt to Equity Ratio
The debit item for the quotient of the impartiality measure the debit item total quantity that the company must regarding the impartiality of the shareholders. It points understood it on the trade of the owner and the parts of the usual against the creditors (borrowings loans and debentures) and the parts to you the preference
Formula
Debt
__________
Equity
Calculation
2008
2009
2010
0
________ = 0
89440
0
________ = 0
111240
72661
____ x 100 = 53%
135154
The comment that:
The part of the disowned ones does not have to be other of 50% of the head that total of production .MG has debits 0 2008 and 2009, that it indicates to the company, is financially constant and is in a good ones to take the position on loan. But, after that it has occur to lend 2010 to you, it has 53% of the parts and the disowned ones for having 47% of the parts,
Liquidity Ratio
Liquidity ratio supplies the information on the cash puts into effect them of the company, in order to pay the ratio to you immediate engagements of short duration. That is measure the solvency of the company, in order to pay the debits of short duration. These circumstances are useful main to the servicers of short duration to the commerce. The three various kinds from the circumstances are, like follow:
Current ratio
Quick ratio
Cash ratio
Current Ratio
The ability of the company of the liquidity ratio measures too fulfilled outside of the due short term commitments, while they become suitable. This relationship in addition admits like relationship of the liquid understood it. It develops the relationship between the current activities and that passivity's flowing of a company. It is used the relationship, in order to measure the liquidity of the company, around for the contact of the relative responsibilities of the short duration as the calculations, the inventory to become the broader, uncovered by the bank, one expenses and creditors of the trade grew.
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Formula
Current assets
_________________
Current liabilities
Calculation
2008
2009
2010
65461
__________ = 0.73 : 1
89440
125045
___________ = 1.12 : 1
111240
255044
________ = 1.88 : 1
135154
The comment that:
A relationship, that he is equal to 2:1, is considered the ideal fabrication of ratio.MG a profit and an appearance of calculation of loss like acceptance to the liquidity ratio from.73: 1 2008 to 1.88:1 in 2010, that it indicates the degradation in the liquid position to the company. The administration would have to examine this drastic acceptance the liquidity ratio that it represents that the liquid position of the company is unstable and the company could confront, if paid the realty to you engagements of short duration in happening.
Quick Ratio
The relationship of the Activities rivers measure the relationship, which is, also known like the liquid relationship or the relationship test acid express, to the rivers. In addition it becomes short term like cash, which defines bank, commerciabili the credit notes and the fewer urgencies the inventory. The inventory is not defined like liquidity, because loss of the value can be simply not converted, cash without one.
Formula
Current asset - Inventory
_____________________________
Current Liabilities
Calculation
2008
2009
2010
47296-18165
_____________= 0.32 : 1
89440
88715- 36330 ______________= 0.47 : 1
111240
182383 - 72661
______________ = 0.81 : 1
135154
The comment that:
MG Fabrications is in very serious position, because it has enough liquid cash money, in order to pay its short term responsibility. The report of 1:1 becomes as ideal C. regarded - and. to receive £1 for each £1. In magnesium the production 2008 has a report of 0.32:1 (32pence for each book), which worsened 2009 at 0.47:1 in the year. Although it improved in the year 2010, but the position of the available active of the society is not satisfying always.
Cash Ratio
The Treasury coefficient likewise well-known under the name report liquidates absolute or acid attempt, measure report the absolute available active in the passive due. It is likewise defined as cash money, bank and due negotiable securities in the passive. It excludes from accounts and poster of the too received sums to received sums.
Formula
Cash + Bank + Market securities
_________________________________
Current Liabilities
Calculation
2008
2009
2010
10966
_______ = 0.12 : 1
89440
12421
_________ = 0.11: 1
111240
7998
___________ = 0 .05: 1
135154
The comment that:
The relationship is ideally value of every penny of means 50 of 0.5:1 of cash for 1 pound is gathering that sufficient of ton the immediate assemblies of short duration of liabilities.MG is in the position much serious one of To since has emergency enough gathering available of ton of the cash the relative one of short duration of the responsibilities. The company does not have NOT of the reservoirs in money which extension the incompetency of the administration. Even if the company in the short run has the inventory and credit like the running assets but that emergency of t immediately changed cash liquids without loss OF VALUE for urgent on need. Therefore the administration would have to think next to the ton fast alternative improves the relative absolute liquidity, like ton increase the relative function of uncovered, increase the profit reducing expenses and increasing to the sales introducing the new strategy of appraisal.
Efficiency Ratio
Efficiency the relationship measure the ability to follow the operational funds effectively in order to produce more value for the owner. It analyzes, while the company uses the relative activities and , which are internal. In addition these conditions are important, if we let a comparable study in the same industry see for the progress and the profit with the equalnesses. Some conditions, which are generally used by the efficiency, are as follow:
Account receivable turnover
Inventory turnover ratio
Average collection period
Account Receivable Turnover
The quotient of the volume of sales the audits, to from masses to receive the effectiveness of the political guidelines of the credit note from the company. It shows that the number of indebted times on, which turned on over a length of time of the year. If the volume of sales is high the management, it is efficient. If the volume of sales under it demonstrates the inefficiency of the management in the meeting of its client is.
Formula
Annual credit sales
______________________________
Accounts receivable/ debtors
Calculation
2008
2009
2010
327646
___________ = 9.01
36330
516042
___________ = 6.76
76294
712629
__________ = 4.08
174385
The comment that:
It is the measure of period of the accumulation of cash of the sales on accreditation. Consequently, comparatively, the fabrication of magnesium from 2008 to 2010 9.01mal 2008 - 4.08mal 2010 gets worse the conversion of the credits in the short run. That indicates that the administration is less efficient .it is in the accumulation of the realty to you customers or is much delicate one in relative politics of accreditation.
The mass of turnover of inventory
Of relationship of turnover of inventory, also the company carries out the relative level of inventory. The low level of inventory indicates the fact that over-supplies the company or to sell the necessary product to the fast or fast point is not. The high level of inventory extension an increase of the cost inventory and the danger to lose the relative value. The sufficient one would have to complete the give of the refueling, in order to correspond to requirement of the commerce.
Formula
Cost of goods sold
_____________________
Average inventory
Calculation
2008
2009
2010
262117
__________ = 28.85
9082.5
430035
___________ = 23.67
18165
606145
___________ = 16.68
36330.5
The comment that:
on the high inventory conversion indicates that efficient handling supply must and turned around .MG strongly inventory conversion of 28.85 in 2008, which sank two for the inefficiency of the management to 23,67 2009 and then even more badly 2010 to 16,68. The low inventory conversion can be two to some reasons like too much store, goods of the low quality, low profit margin, price wretched price, slow mobile goods in the larger quantities. The management should seize immediate measures, in order to improve its inventory conversion, while it is also to profitability the tool; the high conversion means high profit.
Average accumulation period
IS based the average accumulation period on the days. Before it indicates that the number is converted days, which the company must wait its debtors into cash. The maximum accumulation period is 90 days.
Formula
Accounts receivable/debtors
______________________________ X 365 days
Annual credit sales
Calculation
2008
2009
2010
36330
_______ x 365 = 40days
327646
76294
__________ x 365= 54 days
516042
174385
__________ x 365=89 days
712629
The comment that:
A longer period of the accumulation extension inefficiency of the administration. The MG facing problem, if they maintain the payments punctual. The days of accumulation from 40 days to 89 days and/or during three years are increase to you. For immediate accumulation it has, than the handle of the company behind-it obtains for having a short cycle, to the monies in little time. Consequently extension liberal and the accumulation incompetent of the happened one of the credit note. The company is too much generous to the realty to you creditors.
B. LIMITATION OF RATIO ANALYSIS
The limitation ratio analysis means the comparison from an illustration to other relative illustrations. The circumstances financial institutions confront the illustrations of the equilibrium and the customer profits and losses, for giving to the illustration financial institution of a sure company or of the industry. The happened one financial of the different companies in the same industry in the comparable study however only which had the illustrations available made helps. Consequently using the relationship financial, we can only mark the resistances financial institutions and the weaknesses of a company. However it does not assure a complete analysis and it completes of the company. This method to judge the succeeded one of a company has determined limitations, that it prevents the decisional process. Other factors are some, that they consider the relative company and to the caretakers. That that follows is the main limitations of the circumstances financial institutions:
Ignores qualitative aspect.
It determines only the financial situation of the company quantitatively and
ignores the qualitative analysis, which can be important in the adoption of resolutions. E.G. the achievement of the employees.
The performance of competitors.
If the industry then is sunk, all the competitors have worsening of the circumstances, that they represent the full load from the situation financial institution of the limit of the company. The methods different of use different of the company to maintain record. Therefore the relationship of a company cannot be compared to any other company
Reporting errors.
If us then they are dispersions in the financial statements, the circumstances are moreover wrong. The data would have exactly to be therefore Sometimes various that the involontari errors, some companies show one better position, in order to regard their unstable position.
Limitation of financial statements.
How many financial statement conditions highly-qualified delegation of the highly-qualified delegation. Personal decision a carrot in the adoption of resolutions, conditions are a part alternative not only of the aid .
Effects of price level changes.
The inflationary situation interest for a period of the level of executive renders difficult competition. The economy of the country was in recession and used to change the satisfactory increase in the prices of the interests of the production cost of sales and property
Lack of standard formulae.
Not they have been of champion, that they are accepted for the scopes of comparison.
External factors.
The circumstances financial institutions do not consider the effects on Community and the climate local. .
Ratios alone are not adequate.
The decision can be made not accordingly too only relations analysis, if the circumstance is badly financially good or. Conditions are only pointers of the past, or the tendency stream of the prognosis of the company cannot show correct debt therefore the economic designations and line the political market.
Consequently for the achievements of the factors of the company excluded financial conditions to measure it must be taken in consideration.
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C. OTHER METHODS OF FINANCIAL ANALYSIS
There are methods different and the techniques, that they are used, in order to analyze the financial statements. They include:
Comparative Financial Statements
horizontal analysis of the financial statements of the financial statements alias supplies the information from two or more years, that they help the advanced administration to confront the happened one of the company on a determined period of time. It includes the equilibrium of comparison and the comparable calculation profits and losses. Ass the change in the commerce if in favorable sense or it it has need of some to change or in the changes is improving the profit of the commerce. AS AN EXAMPLE. if the net income of the company is reduced, even if the sales, that they are increased during this period, it is a transaction of great interest. The comparable financial statements contribute to discover where the costs are increased, that they have lowered the net income like year preceding. The limitation of this method is that he is not able, changes in the values totals to the exposure in the engagements and the understood one them.
II. Common Size Statement
The general format of the declaration or vertical analysis, expressed in the percentage, exposures, as the different members of the calculation profits and losses the profit of the company interests and takes all the circuit of base. Moreover it is used, in order to confront the different companies on the same time. The advanced administration uses this method frequently, in order to compare the relative one happening to the better company in the relative industry, in order to see, where the relative company is situated in the industry. That helps, if it takes them the decisions, in order to improve the happened one of the company, but this method has relative limitation in more. We cannot explain to the just comparison outside, if there is difference with regard to the period of time.
III Trend Analysis
The analysis of tendency, expressed in the percentage, confronts the last data over a duration of the time, that it is necessary a sure base year of the circuit. The percentages of tendency can be used, in order to see the development of the company in the relationship with the realty to you values and the engagements, arresting a year like lower surface that it is taken, in order 100% are. The last and tendency puts into effect them is remarkable, if it is reduced, increased or to the constant, that the administration helps to preview the future tendency and to take the decisions consequently. It is more frequently used in the stock market, in order to see the tendency of the bear or the Taurus of the company and the attendance in the approval of the investor of the resolutions.
IV.Funds Flow Analysis
The main analysis of the river indicates the movement of the monetary bottom of the present values them to the understood one them of the plant or of the present values them to the engagements of long duration or on the contrary. That is extension the relationship between the sources that understood them and like this understood them to use. It helps the responsible to being marked the problems has made reference those inside to the Kapitaln, that it would have been come to contact of the future decisions at last and, that they are generated over behind tendency.
v.Cash Flow Analysis
The analysis of the circulation of money extension the relationship between the wealth of the cash and escaping the cash of the company. It carries to that is determines the movement of the cash in the enterprise of the trade. It confronts acquires concerning total quantities is the sales total quantities. The line keeps the free picture produced from, many to cash for you that the assigning decisions of the future assistance in taking is. The three important elements in the explanation of the circulation of money are investments of enterprises (credit notes at short notice, take an inventory and accounts to pay around), like acquisition of the new machinery, lend structure and financing and the central debit items to you.
Conclusion
The financial statements represent an illustration of happened of the company and the relative situation financial institution. Over the happened one it will estimate in a expressive sense a comparison with other companies in the industry, with the last one happening of the company or with an asked absolute fixed point. In the coefficient analysis no absolute fixed point, excluded, exists profit if it is loaded over the average costs of the acquisition with understood them.
From the illustrations of the activities in this article it indicates that the PLC of production of succeeding magnesium of is examined in a period of relative time. The financial statements in three years are one structure too much in the short term to judge to inner happening of the company. Secondarily there are the financial data of no other competitor that is to confront the happened one of the present of the MG FABRICATION . Therefore it would have to not only put still the administration only on coefficient analysis. The advanced administration must use the different methods, in the order receives an idea of turns out to you economic of bottom to, in order to take the decisions relative.
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