FINANCIAL MANAGEMENT- is the efficient and effective management of the
financial resources of a business entity to attain its predetermine objectives relative
to its: liquidity, profitability, stability, growth, effectiveness of mgt.
Financial Analysis- is an evaluation of both a firm’s past financial performance and its
prospect for the future. It involves an analysis of the firm’s financial statement and its
flow of funds.
Financial statement analysis- involves the calculation of various ratios. It is used by
such interested parties as creditors, investors, and managers to determine the firm’s
financial position relative to that of others. The way in which an entity’s financial
position results are viewed by investors and creditors will have an impact on the firm’s
reputation, price/earning ratio, and effective interest rate.
Funds flow analysis- is an evaluation of the firm’s statement of changes in financial
position in order to determine the impact that its sources and uses of funds have on firm’s
operations and financial condition. It is used in decisions that involve corporate
investment, operations and financing.
A financial analyst uses the ratios to make two types of comparisons:
1. Industry comparison- The ratios of a firm are compared with those of similar
firms or with industry average or norms to determine how the company is faring
relative to its competitors.
2. Trend analysis- A firm’s present ratio is compared with its past and expected
future ratios to determine whether the company’s financial position is improving
or deterioration over time.
Horizontal Analysis- Is used to evaluate the trend in the accounts over the years.
Companies often show comparative analysis data for five years in annual reports. It
stresses the trends of the various accounts, it is relatively easy to identify of wide
divergence that require further attention.
Vertical Analysis- A significant item on financial statement is used as a base value, and
all other items on the financial statement are compared to it. In performing vertical
analysis for the balance sheet, total assets is assigned 100%. Each asset account is
expressed as a percentage of total assets. Total liabilities and stockholder’s equity is also
assigned 100%. In the income statement, net sales is given of 100 % and all other
accounts are evaluated in comparison to the net sales.
FINANCIAL RATIOS CAN BE CLASSIFIED INTO FIVE GROUPS:
1. Liquidity ratios
2. Activity ratios
3. Leverage ratios
4. Profitability ratios
5. Market value ratios
, LIQUIDITY RATIOS
LIQUIDITY is a company’s ability to meet its maturing SHORT-TERM obligations.
Liquidity is essential to conducting business activity, particularly in times of adversity,
such as when a business is shut down by a strike or when losses ensue due to an
economic recession or steep rise in the price of a raw material or part. If liquidity is
insufficient to cushion such losses, serious financial difficulty may result.
Analyzing corporate liquidity is especially important to creditors. If a company
has a poor liquidity position, it may be a poor credit risk, perhaps unable to make interest
and principal payments.
If future cash outflows are expected to be high relative to inflows, the liquidity
position of the company will deteriorate.
NET WORKING CAPITAL- is a safety cushion to creditors. A large balance is
required when the entity has difficulty borrowing short notice.
Increase in NWC is a favorable sign.
1) NWC= current assets-current liabilities (VALUE)
CURRENT RATIO- This ratio which is subject to seasonal fluctuations is used to
measure the ability of an enterprise to meet its current liabilities out of current assets. A
high ratio is needed when the firm has difficulty borrowing short notice. A limitation of
this ratio is that it may rise just prior to financial distress because of a company’s desire
to improve its cash position by, for example, selling fixed assets. Such dispositions have
a detrimental effect upon productive capacity.
2) CURRENT RATIO= current assets/current liabilities (PERCENT)
Increase is a good sign.
QUICK (ACID TEST) RATIO- is a stringent test of liquidity. It is found by dividing
the most current assets (cash, marketable securities, accounts receivable) by current
liabilities.
3) QUICK RATIO= cash+marketable securities, A/R / current liabilities.
(PERCENT)
Increase is a good sign.
financial resources of a business entity to attain its predetermine objectives relative
to its: liquidity, profitability, stability, growth, effectiveness of mgt.
Financial Analysis- is an evaluation of both a firm’s past financial performance and its
prospect for the future. It involves an analysis of the firm’s financial statement and its
flow of funds.
Financial statement analysis- involves the calculation of various ratios. It is used by
such interested parties as creditors, investors, and managers to determine the firm’s
financial position relative to that of others. The way in which an entity’s financial
position results are viewed by investors and creditors will have an impact on the firm’s
reputation, price/earning ratio, and effective interest rate.
Funds flow analysis- is an evaluation of the firm’s statement of changes in financial
position in order to determine the impact that its sources and uses of funds have on firm’s
operations and financial condition. It is used in decisions that involve corporate
investment, operations and financing.
A financial analyst uses the ratios to make two types of comparisons:
1. Industry comparison- The ratios of a firm are compared with those of similar
firms or with industry average or norms to determine how the company is faring
relative to its competitors.
2. Trend analysis- A firm’s present ratio is compared with its past and expected
future ratios to determine whether the company’s financial position is improving
or deterioration over time.
Horizontal Analysis- Is used to evaluate the trend in the accounts over the years.
Companies often show comparative analysis data for five years in annual reports. It
stresses the trends of the various accounts, it is relatively easy to identify of wide
divergence that require further attention.
Vertical Analysis- A significant item on financial statement is used as a base value, and
all other items on the financial statement are compared to it. In performing vertical
analysis for the balance sheet, total assets is assigned 100%. Each asset account is
expressed as a percentage of total assets. Total liabilities and stockholder’s equity is also
assigned 100%. In the income statement, net sales is given of 100 % and all other
accounts are evaluated in comparison to the net sales.
FINANCIAL RATIOS CAN BE CLASSIFIED INTO FIVE GROUPS:
1. Liquidity ratios
2. Activity ratios
3. Leverage ratios
4. Profitability ratios
5. Market value ratios
, LIQUIDITY RATIOS
LIQUIDITY is a company’s ability to meet its maturing SHORT-TERM obligations.
Liquidity is essential to conducting business activity, particularly in times of adversity,
such as when a business is shut down by a strike or when losses ensue due to an
economic recession or steep rise in the price of a raw material or part. If liquidity is
insufficient to cushion such losses, serious financial difficulty may result.
Analyzing corporate liquidity is especially important to creditors. If a company
has a poor liquidity position, it may be a poor credit risk, perhaps unable to make interest
and principal payments.
If future cash outflows are expected to be high relative to inflows, the liquidity
position of the company will deteriorate.
NET WORKING CAPITAL- is a safety cushion to creditors. A large balance is
required when the entity has difficulty borrowing short notice.
Increase in NWC is a favorable sign.
1) NWC= current assets-current liabilities (VALUE)
CURRENT RATIO- This ratio which is subject to seasonal fluctuations is used to
measure the ability of an enterprise to meet its current liabilities out of current assets. A
high ratio is needed when the firm has difficulty borrowing short notice. A limitation of
this ratio is that it may rise just prior to financial distress because of a company’s desire
to improve its cash position by, for example, selling fixed assets. Such dispositions have
a detrimental effect upon productive capacity.
2) CURRENT RATIO= current assets/current liabilities (PERCENT)
Increase is a good sign.
QUICK (ACID TEST) RATIO- is a stringent test of liquidity. It is found by dividing
the most current assets (cash, marketable securities, accounts receivable) by current
liabilities.
3) QUICK RATIO= cash+marketable securities, A/R / current liabilities.
(PERCENT)
Increase is a good sign.
