Interpreting Financial Reports - Part 2
Companies like ABC SDN BHD, a corporation in Malaysia prepare and furnish financial statements on a regular basis for the purpose of providing stakeholders reports of the company’s financial standing - Interpreting Financial Reports introduction. However, accounting is not easy to analyze regarding how a particular company is doing financially in relation to others in the industry. One of the best ways to compare two businesses is to perform a ratio analysis on the company’s financial statements. A ratio analysis is commonly use in financial statements that looks at various numbers, such as net profit or total expenses and analyze the relationship between each other.
According to Parrino, financial ratios are used in financial analysis to eliminate problems caused by comparing two or more companies of different size or when looking at the same company over time as the size changes (p. 85) Financial Ratios are grouped by their purpose but the most common ratios are Liquidity, Debt, Turnover, and Profitability. The key users of financial ratios have variations. Short-term creditors may use liquidity ratio. Potential lenders or existing lenders may use leverage ratio, and top corporations may use turnover ratio.
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Investors and stockholders may be more interested with profitability ratio to get their information. The two most common Liquidity Ratio are Current and Quick Ratio. Inventory Turnover Ratio, Accounts Receivable Turnover or Total Asset Turnover ratios can be used to determine a company’s turnover or efficiency ratio. To determine a company’s leverage, the Debt Ratio or the Debt-to-Equity Ratio is the preferred tool to use. The Return on Assets Ratio can determine the profitability of the company,
The financial highlight of ABC SDN BHD, a corporation in Malaysia describes profitability, liquidity, assets, and capital. The company’s profitability shows a decrease in turnover, recovery of earnings, and lower cost of sales but higher total operating expenses. The company’s liquidity shows a satisfactory liquidity standing and experienced cash flow inflexibility. The company’s asset management shows a reduced efficiency of the management of units and assets, lengthened collection but shortened payment periods, and a good inventory control.
The company’s capital structure and solvency undertaken a much greater current liabilities than long-term liabilities to finance its operation, and the current liabilities are reported to be rising. There is a lower leveraged for the group more dependent on equity than debt to fund its assets. Through financial statements, a company can compare and rate their performance with related industry. The key is to select companies to invest in and compare rate of returns, future terms, and evaluate potency and weak points.
Comparative study of ratios and benchmark are useful for investors and management. Management can use it to get information for future decision-making process, and investors can analyze related risk. According to Northwest Farm Credit Service, a ratio greater than 1. 50 is considered good, between 1. 00 and 1. 50 is descent, and less than 1. 00 is not promising. Equivalent to at least 20 % of total annual operating expenses is fakir for debt to assets ratio and should be less than 30 % to be thought of as a good one. 30 to 50 % descent and greater than 50 % is considered poor.
Operating margin of 25 % or greater is good, 10 % to 25 % descent, and less than 10 % is below average (2008) Ratio comparison provides important information to businesses and potential investors and shareholders. However, although ratio calculation provides a glimpse of the financial status, of a company, it can be misleading if not interpreted properly. Fluctuations occur from quarter to quarter and numbers can change, depending upon sales, stocks, revenue, and operating cost. Ratio comparison is a valuable toot if caution is taken into consideration.