The new style of financial management that business improvement presupposes has created the basis for companies to develop in an organized way all the necessary transformations that allow for efficient, economic and effective management, through financial indicators.
During the financial statement analysis process, a diverse range of possibilities are available to satisfy the objectives undertaken in planning and carrying out this evaluation task.
The analyst can then choose the tools that best satisfy the intended purpose, among which the following stand out:
- Comparative analysis Trend analysis Proportional financial statements Financial indicators
From the point of view of the statement of changes in the financial situation and the statement of cash flows. Also considered within the category of specialized analysis:
- a) cash or cash flow projections; b) analysis of changes and variations in cash flow; c) statement of variation of gross margin and d) break-even analysis.
- Comparative analysis
This analysis technique consists of comparing the financial statements of two or three accounting years and determining the changes that have occurred in the different periods, both in percentage and absolute terms, with the aim of detecting those variations that may be relevant or significant for the company.
- Trend analysis
The trend analysis method is a refinement of the inter-annual changes or comparative analysis and is used when the series of years to be compared is greater than three. Comparing financial statements over a long series of periods will allow to assess the direction, speed and breadth of the trend, as well as to use its results to predict and project figures for one or more significant items.
- Proportional financial statements
The analysis of proportional financial statements is, basically, the evaluation of the internal structure of the financial statements, since the results are expressed as the proportion or percentage of a group or subgroup of accounts within a total, which is representative of what you want to analyze. This technique allows evaluating the change of the different components that make up the large groups of accounts of a company: assets, liabilities, equity, results and other categories that are made according to the needs of each economic entity.
- Financial indicators
Finally, the financial indicators or ratios express the mathematical relationship between one magnitude and another, demanding that said relationship be clear, direct and understandable so that information, conditions and situations that could not be detected by simply observing the individual components can be obtained of financial reason.
Other methods of analysis are:
The financial ratios give indicators to know if the entity subject to evaluation is solvent, productive, if it has liquidity, etc.
Some of the financial reasons are:
- FINANCIAL REASONS:
Calculation Method, and its objective
| 1. | WORKING CAPITAL
Current Assets - Current Liabilities It is expressed in: Times. |
It shows the ability of the company to meet its short-term obligations with its current assets. It measures the number of times that the business's current assets cover its short-term liabilities. |
| two. | LIQUIDITY OR ACID TEST
Current Assets / Current Liabilities It is expressed in: Times |
It shows the company's ability to meet its short-term obligations with its most liquid assets. |
| 3. | DEBT OR SOLIDITY
Total liabilities / Total assets It is expressed in: Times Per cent |
It measures the portion of debt-financed assets. Indicates the ratio or percentage that represents the total debts of the company in relation to the resources available to satisfy them. |
| Four. | DEBT TO CAPITAL
Total liabilities / Liquid Capital It is expressed in: Times |
It expresses the relationship that exists within the capital structure between the resources provided by third parties and the equity. Indicates the proportion that the liability represents in relation to the liquid capital. |
| 5. | FROM EQUITY TO TOTAL ASSETS.
Total Equity / Total Assets It is expressed in times |
It is the relationship that exists within the capital structure between the resources provided by the shareholders or owners of capital and total assets. |
| 6. | GROSS PROFIT ON SALES OR GROSS PROFIT MARGIN
Gross profit on sales / Net sales It is expressed in: Ratio or percent. |
It reflects the proportion that the gross profits obtained represent in relation to the net sales that produce them. |
| 7. | NET INCOME ON SALES OR NET PROFIT MARGIN.
Net income / Net sales They are expressed in Ratio or Percent |
It measures the ratio or percent that the net profit represents in relation to the net sales that are analyzed, that is, it measures the ease of converting the sales into profit |
| 8. | OF OPERATING EXPENSES INCURRED
Operating expenses / Net Sales They are expressed in: Reason or Percent |
It measures in what proportion the operating expenses incurred represent in relation to sales for the period under analysis. |
| 9. | ROTATION OF ACCOUNTS RECEIVABLE AND AVERAGE PERIOD OF COLLECTION OR PERIOD OF COLLECTION.
Sales on Credit / Average Cta. Charge They are expressed in: Times Average Collection Period / 360 Rotation (times) It is expressed in: Days. |
Indicates the number of times that the average balance of accounts and receivables passes through sales during the year. It expresses the number of days that accounts and receivables remain receivable. Measure the efficiency of customer credit. |
| 10. | INVENTORY ROTATION AND PERIOD OF STOCK
Trading companies Cost of sales / Average inventory It is expressed in: times Industrial business Mat expense. Premiums and Materials / Average Inventory Period of existence: 360 / Rotation (times) Expressed in: days |
It expresses the average number of times inventories rotate during the year. It indicates the days that the goods remain in stock on average. |
| eleven. | ROTATION OF CTAS PAYABLE AND PERIOD OF PAYMENT.
Annual purchases / Average accounts payable It is expressed in: times Payment period / 360 Rotation (times) It is expressed in days |
It measures the efficiency in the use of supplier credit. Indicates the number of times accounts and bills payable go through purchases during the year.
Expresses the number of days that accounts and bills payable remain payable. |
| 12. | ROTATION OF WORKING CAPITAL
It is expressed: sometimes (Average working capital) / Net sales / 360 |
Shows the times that working capital is able to generate income from exploitation or sales. |
| 13. | PROFITABILITY OR PERFORMANCE ON STOCKHOLDERS 'EQUITY.
Net Income / Average Stockholders' Equity It is expressed in: times |
It measures the return obtained for each peso that the investors or owners of the Capital have invested in the company |
| 14. | PROFITABILITY OR PERFORMANCE ON INVESTMENT OR TOTAL ASSETS
Net Income / Total Assets Average It is expressed in: Ratio or Percent |
It measures the return obtained for each peso invested in assets. |
| fifteen. | TOTAL ASSET ROTATION
Net sales / Average total assets It is expressed in: times. |
Measures overall effectiveness in the use of assets |
MARKET VALUE REASONS.- Relates the price of the company's shares to its earnings and its book value per share, provide an indication of what investors think of past performance and future plans.
REASONS PRICE / UTILITIES. - Show the number of investors who are willing to pay per dollar of reported profits. Shows the level of risk and growth prospects
Price / earnings ratios = price per share
Earnings per share
MARKET VALUE / BOOK VALUE REASON.- Shows how investors see the company, high rates of return on equity sell in multiples higher than their book value.
Book value per share = common stock capital
Outstanding shares
And dividing the market price per share by the book value we obtain the ratio of market value to book value (M / B)
Book market value = market price per share
Book value per share
TREND ANALYSIS .- It is the trend analysis of financial ratios over time. It is done through the graphing of the reasons based on the years passed
DU PONT GRAPHIC.- It is designed to show the relationships between return on investment, asset turnover, profit margin, and leverage.
DU PONT EQUATION.- It is obtained by multiplying the profit margin by the rotation of total assets and provides us with the rate of return on ROA assets.
ROA = profit margin X Rotation of total assets
= net income X Sales
total active sales
ROA is the net income available to common shareholders divided by total assets, where the rate of return on ROA assets must be multiplied by the ROE equity multiplier
ROE = ROA X equity capital multiplier
= net income X total assets
total assets common stock capital
Du Pont's equation changed
ROE = net income X Sales x total assets
sales total assets common stock capital
APPLICATION OF FINANCIAL INDICES IN THE COMPANY
| ALEXISMAYO SA | |||
| STATEMENT OF INCOME | |||
| As of December 31, 2004 | |||
| Sales | 500,000 | ||
| Less: | |||
| Sales discounts | 44,500 | ||
| Return | 35,000 | 79,500 | |
| Net sales | 420,500 | ||
| Cost of Items Sold | |||
| Merchandise Inventory as of January 1, 2004 | 100,000 | ||
| Purchases | 90,000 | ||
| Less discount on purchases | 10,000 | ||
| Net purchases | 80,000 | ||
| Freight charges received | 10,000 | 90,000 | |
| Value of goods available for sale | 190,000 | ||
| Less merchandise inventory as of December 31, 2004 | 20,000 | ||
| Cost of items sold | 170,000 | ||
| Gross profit on sales | 250,500 | ||
| Operating costs | |||
| Selling expenses | 22,000 | ||
| Salaries and commissions to sellers | 45,600 | ||
| Sales office salaries | 40,000 | ||
| Viaticals | 25,000 | ||
| Freight charges forwarded | 40,000 | ||
| Depreciation of the sales team | 8,500 | ||
| Telephone | 9,000 | 190,100 | |
| Administrative expenses | |||
| Office salaries | 39,999 | ||
| Public services | 12,129 | ||
| Depreciation of the building | 4,000 | ||
| Depreciation of office equipment | 3,000 | ||
| 59,128 | 249,228 | ||
| Income from operations | 1,272 | ||
| Other income | |||
| Dividends collected | 10,210 | ||
| Leases Earned | 4,519 | 14,729 | |
| 16,001 | |||
| Other expenses | |||
| Interest on bonds and documents | 12,001 | ||
| Profit before tax participation | 4,000 | ||
| 15% Workers | 600 | ||
| 3,400 | |||
| 25% Income Tax | 850 | ||
| Net profit obtained | 2,550 | ||
| ALEXISMAYO SA | ||||||||||||
| BALANCE SHEET | ||||||||||||
| As of December 31, 2004 | ||||||||||||
| PASSIVES | 105,700.00 | |||||||||||
| ASSETS | Providers | 5,650.00 | ||||||||||
| Current active: | Debts to pay | 5,000.00 | ||||||||||
| Banks Box | 20,000.00 | Provisions payable | 23,200.00 | |||||||||
| Accounts Receivable | 26,000.00 | Taxes and workers x pay | 1,450.00 | |||||||||
| Advances to suppliers | 8,600.00 | Total Current Liabilities | 35,300.00 | |||||||||
| Provision uncontainable accounts | -1,200.00 | |||||||||||
| Inventories | 25,400.00 | NON-CURRENT LIABILITIES | ||||||||||
| Total Current Assets | 78,800.00 | Documents x pay LP | 32,000.00 | |||||||||
| Retirement Reserve | 6,800.00 | |||||||||||
| Fixed Assets | Reservation Voluntary Waiver | 31,600.00 | ||||||||||
| Purchase of Fixed Assets | 154,000.00 | Total Non-Current Liabilities | 70,400.00 | |||||||||
| (-) Accumulated depreciation | -10,400.00 | |||||||||||
| Total fixed assets | 143,600.00 | HERITAGE | 116,700.00 | |||||||||
| Social capital | 57,600.00 | |||||||||||
| TOTAL ASSETS | 222,400.00 | Legal Reserve | 31,400.00 | |||||||||
| Capital Reserve | 19,150.00 | |||||||||||
| Earnings from previous years | 6,000.00 | |||||||||||
| Profit of the Exercise | 2,550.00 | |||||||||||
| TOTAL LIABILITIES AND EQUITY | 222,400.00 | |||||||||||
| Financial Reason | Formula | 2002 | 2003 | 2004 | Industry Average | Evaluation | ||||||
| LIQUIDITY | ||||||||||||
| Circulating Reason | Current Assets | 2.04 | 2.08 | 2.23 | 2.05 | Okay | ||||||
| Current Liabilities | ||||||||||||
| Acid test | Current Assets - Inventories | 1.32 | 1.46 | 1.51 | 1.10 | Okay | ||||||
| Current Liabilities | ||||||||||||
| Cash ratio | Cash | 1.5 | 1.2 | 0.57 | 0.80 | Poor | ||||||
| Current Liabilities | ||||||||||||
| Working capital | Assets C - Liabilities C. | 49,000 | 50,000 | 43,500 | 10,000 | Okay | ||||||
| EXERCISE | ||||||||||||
| Inventory rotation | Vein Cost | 5.1 | 5.7 | 6.69 | 6.6 | okay | ||||||
| Inventories | ||||||||||||
| Collection period | Accounts receivable | 43.9 days | 45 days | 40 days | 44.3 days | Okay | ||||||
| Net sales | ||||||||||||
| Payment period | Debts to pay | 75.8 days | 60 days | 63 days | 66.5 days | okay | ||||||
| Purchases | ||||||||||||
| Rotation of total assets | Sales | 0.94 | 1.2 | 1.89 | 0.75 | okay | ||||||
| Total Assets | ||||||||||||
| DEBT | ||||||||||||
| Total debt | Totally passive | 36.80% | Four. Five% | 48% | 40% | Poor | ||||||
| Total active | ||||||||||||
| Interest coverage | Earnings before imp | 5.60% | 6% | 5% | 4.3 | Okay | ||||||
| Interests | ||||||||||||
| Current Debt | Current Liabilities | 30% | 35% | 32% | 32% | okay | ||||||
| Total active | ||||||||||||
| COST EFFECTIVENESS | ||||||||||||
| Gross Profit Margin | Gross profit | 31.40% | 38% | 60% | 30% | Okay | ||||||
| Sales | ||||||||||||
| Operating Profit Margin | Operating profit | 14.60% | 15.60% | 12% | eleven% | Okay | ||||||
| Sales | ||||||||||||
| Net Profit Margin | Net profit | 8.20% | 9.50% | 5% | 6.20% | Poor | ||||||
| Sales | ||||||||||||
| Earnings per share | Net profit | 3.26 | 3.5 | 3% | 2.26 | Okay | ||||||
| Number of actions | ||||||||||||
| Return on assets | Net profit | 7.80% | 9% | 6% | 4.60% | Okay | ||||||
| Total Assets | ||||||||||||
| Return on capital | Net profit | 13.70% | 14% | 9% | 8.50% | Okay | ||||||
| Share capital | ||||||||||||
| MARKET | ||||||||||||
| Price / earnings ratio | Market price per share | 10.5 | 12 | 10.00 | 12.5 | okay | ||||||
| Earnings per share | ||||||||||||
| Market value at book value | Market price per share | 1.25 | 1.6 | 1.00 | 1.3 | okay | ||||||
| Book value per share | ||||||||||||
See more in Lawrence J. Gitman "Principles of Financial Management" 65-68
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