Updated at 06/02/2024 - 10:51 pm
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.
LIST OF FINANCIAL INVESTMENT INDICATORS (BUSINESS VALUATION) #
ROE - Return on common equity (Return on common equity), is the most important ratio for shareholders, measuring the profitability per dollar of capital of common shareholders.
Formula: ROE = Net Profit for Common Shareholders/Common Equity
This index is an accurate measure to evaluate how much profit a dollar of capital spent and accumulated generates. This ratio is often analyzed by investors to compare with stocks in the same industry on the market, from which to refer when deciding which company's shares to buy.
A higher ROE ratio proves that the company's board of directors effectively uses shareholders' capital, so this index is often an important criterion to consider investment opportunities in a business's shares.
Assessing what is a reasonable ROE ratio will vary across industries and business fields. For example, in the Vietnamese stock market, the average ROE of industrial service enterprises is about 8,5%, construction and construction material supply enterprises have ROE of 11,6%, while , retail businesses have a significantly higher ROE, at 25,6%. This difference depends on the level of capital intensiveness in business activities to generate profits.
A general rule of thumb when evaluating businesses is to aim for companies with ROE at or above the industry average. For example, company A has maintained a steady ROE of 18% over the past few years compared to the industry average of 15%. Investors can conclude that A's management has used shareholder capital effectively to generate above-average profits.
When calculating this ratio, investors can evaluate it from the following specific angles:
– ROE is less than or equal to bank loan interest, so if the company has bank loans equivalent to or higher than shareholder capital, the profit generated will only be to pay bank loan interest.
– If the ROE is higher than the bank loan interest rate, you must evaluate whether the company has borrowed from the bank and exploited all its competitive advantages in the market to be able to evaluate whether this company can increase the ROE ratio in the future or not. .
P/E index (Price to Earning ratio) is an index that evaluates the relationship between the market price of a stock (Price) and earnings per share (EPS).
The meaning of this index represents the price you are willing to spend for a profit earned from a stock. Or, how much you are willing to pay for a business's stock based on that business's profits (income).
Formula to calculate P/E index:
P/E = Market price of stock / Earnings per share
For example: Suppose the market price as of December 31, 12 of stock X is 2020 VND, the earnings per share (EPS) for the year of this company is 21.000 VND. Thus, the P/E of stock X is 3.000.
EPS (Earnings Per Share) is a financial index used to measure the average profit per share of a company over a certain period of time. It shows the amount of a company's after-tax profits distributed to each outstanding share on the stock market.
The EPS index is one of the most important indicators in assessing the value of a company and its shares on the stock market. It provides information about the profits a company generates per share and helps investors evaluate the company's future profitability.
The calculation of EPS depends on many factors such as profit after tax, number of outstanding shares and other investment fees. Companies with high EPS are likely to attract the attention of investors and can influence the company's share price on the stock market.
Formula to calculate EPS index
EPS (Earnings Per Share) is calculated by dividing a company's after-tax profit by the number of shares outstanding on the stock market.
The specific formula is as follows:
EPS = (Profit after tax – Preferred dividends) / Number of outstanding shares
Profit after tax: is the amount of profit the company earns after deducting all expenses and income taxes.
Preferred dividend: is an amount of money paid to preferred shareholders before calculating profits per common share.
Number of outstanding shares: is the total number of shares of the company being distributed on the stock market.
Assuming company A has an after-tax profit of 100 billion VND, no preferential dividends and the number of outstanding shares is 100 million shares, then the company's EPS index will be:
EPS = (100 billion VND – 0) / 100 million shares = 1000 VND/share
The higher the EPS, the more profitable the company is, and therefore the company's shares are likely to increase in price on the stock market. However, EPS should also be considered along with other factors such as stock price and other financial metrics to evaluate a company's health and growth potential.