Updated at 29/09/2022 - 09:59 am
Financial analysis is the creation of special analyzes to answer specific business questions and forecast possible financial scenarios in the future. The goal of financial analysis is to shape business strategy through credible, practical insight rather than intuition.
By providing a detailed view of companies' financial data, financial analysis provides tools for directors to gain insight into key trends and take action to improve business performance.
LIST OF FINANCIAL INDICATORS OPERATIONS #
Current Ratio = Current Assets / Current Liabilities
This ratio indicates a company's ability to use current assets such as cash, inventory or accounts receivable to pay its short-term liabilities. The higher this ratio, the more likely the company will be able to repay all its debts.
If the current ratio is less than 1, it indicates that the company is in a negative financial position, which is likely to default on its debts as they mature.
However, this does not mean that the company will go bankrupt because there are many ways to raise more capital.
On the other hand, if this ratio is too high, it is also not a good sign because it shows that the business is not using assets effectively.
Quick ratio = (Cash and cash equivalents+accounts receivable+short-term investments)/(Current liabilities)
Explain the meaning
The quick ratio shows whether a company has enough current assets to pay its short-term liabilities without having to sell inventory.
This indicator more accurately reflects the current payment index. A company with a quick ratio less than 1 is unlikely to be able to repay its short-term liabilities and must be considered carefully. In addition, if this ratio is much smaller than the current ratio, it means that the short-term assets of the business depend too much on inventory. Retail businesses are prime examples of this.
Accounts Receivables Turnover = Annual Net Sales/Average Receivables
Where: Average receivables = (Remaining receivables in the previous year's report and this year's receivables)/2
Explain the meaning
This is an indicator that shows the effectiveness of the credit policy that businesses apply to customers.
The higher the turnover ratio, the faster the business is paid off by customers. However, it is necessary to compare with businesses in the same industry to consider, because this index is still too high, it is possible that the business will lose customers because customers will switch to consuming products of competitors. Competitors offer longer credit periods.
How to calculate Inventory Turnover?
Inventory Turnover = Cost of Goods Sold/Average Inventory
Where: Average inventory = (Inventory in previous year's report + current year's inventory)/2
Explain the meaning of Inventory Turnover
This index shows the ability of the enterprise to manage inventory effectively or not.
The higher the inventory turnover ratio, the more it shows that the business sells quickly and the inventory is not stagnant in the business.
Basically, a high inventory turnover ratio shows that the business will be less risky, but too high is also not good because it means that the amount of inventory in the warehouse is not much, if market demand is not high. If the market increases suddenly, it is very likely that the business will lose customers and be taken by competitors for market share.
For effective management, businesses need to maintain the right amount of inventory for the needs of customers.