Category Archives: FINANCIAL STATEMENTS ANALYSIS

Long-term Solvency

Long-term Solvency Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This aspect of the financial position of a borrower is of concern to the long-term creditors, security analysis and the present and potential owners of a business. The long-term solvency is measured by the leverage/capital structure and profitability ratios which focus on earning power and operating ef

Liquidity Position

Liquidity Position With the help of ratio analysis conclusions can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would he satisfactory if it is able to meet its current obligations when they become due. It firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid fund, to pay the interest on its short-maturing debt usually within

IMPORTANCE AND LIMITATIONS OF RATIO ANALYSIS

IMPORTANCE AND LIMITATIONS OF RATIO ANALYSIS Importance As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts or a comparative basis and enables the drawing of inferences regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: (i) liquidity

COMMON SIZE STATEMENTS

COMMON SIZE STATEMENTS Ratio analysis apart another useful way of analyzing financial statements is to convert them into common size statements by expressing absolute rupee amounts into percentages. When this method is pursued, the income statement exhibits each expense item or group of expense items as a percentage of net sales and net sales are taken at 100 per cent. Similarity, each individual asset and lia

Financial Statements of Hypothetical Ltd After Growth (Table)

Financial Statements of Hypothetical Ltd (After Growth) TABLE Financial Statements of Hypothetical Ltd (After Growth) The equation 7.71 indicates that the SGR of the firm can be increased by anyone or more of the four factors: (1) Increase in net profit margin, (2) Increase in the asset turnover ratio, (3) Increase in the financial leverage, and (4) Increase in the retention ratio (or decrease in the dividend pa

Determination of SGR of Hypothetical Ltd (Table)

Determination of SGR of Hypothetical Ltd TABLE Determination of SGR of Hypothetical Ltd The Hypothetical Ltd can grow at a maximum rate of 20.97 per cent per year without external equity financing and maintaining existing ROE. (The actual rate of growth in sales may be lower if the market cannot absorb increased sales of 20.97 per cent. A confirmation is provided by Table in terms of maintaining financing policie

Sustainable Growth Rate (SGR)

Sustainable Growth Rate (SGR) The SGR is the maximum rate at which the firm can grow by using internal sources (retained earnings) as well as additional external debt but without increasing its financial leverage (debt equity ratio). To determine SGR, the two additional assumptions are, (i) The firm has a target capital structure (D/E ratio) which it wants to maintain, (ii) The firm does not intend to sell new e

Internal Growth Rate (IGR)

Internal Growth Rate (IGR) The IGR is the maximum rate at which a firm can grow (in terms of sales or assets) without external financing of any kind. To determine the IGR till following assumptions are made (i) There is an increase in assets of the firm in proportion to the sales. (ii) The net profit margin after taxes (EAT) is in direct proportion to sales, (iii) The firm has a target dividend payout ratio (i

Growth Ratios

Growth Ratios These ratios measure the rate at which a firm should grow. Growth in sales need additional investment to support incremental sales both in terms of current assets (such as inventory and debtors) and productive capacity/long-term assets (such as plant machinery). The rate at which a firm can grow depends on many factors. Included among these are, investment in assets required for a given growth r

ROE (Five-way Basis) of firms A and B (Table)

ROE (Five-way Basis) of firms A and B TABLE ROE (Five-way Basis) of firms A and B Table shows that there is little impact of taxes and interest payment on the difference in the ROE of the two firms (as reflected in the EAT/EBT as well as BT/EBIT ratios). The financial, leverage ratio, as pointed out earlier is a major explanatory factor for higher ROE of Firm A vis-a-vis Firm B. Finance-Assignments.comInst