Analysis of the Operation and Financial Condition of the Enterprise

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Analysis of the Operation and Financial Condition of the EnterpriseDeviation % = (DI)* 100-100%, or (2.5)Deviation % = (value analysed - base indicator)/base indicator*100 (2.6) Financial ratio method – calculation of the reporting data ratios, identification of thecorrelations between the indicators. The system of analytical ratios is one of the leadingelements of the financial status analysis used by different groups of users: managers,analysts, shareholders, investors, creditors etc. Tens of such indicators are known andfor practical reasons they are subdivided in several groups. Most often five groups ofindicators are highlighted in areas of financial analysis below.Calculation and analysis of financial ratios – financial ratios are obtained by usingthe methods for calculation of the indicators and the results are analysed. Thecalculated ratios can be compared to:- certain standards;- indicators from previous periods;- financial indicators of competitors;- industry average figures.Financial ratio analysis is a systematic comparison of relations by using the informationof the financial statements with the purpose of identification of the logical developments inthe enterprise and description of the enterprise financial position. In the ratio or indicatoranalysis significant correlations between two components of the financial statements arebeing determined. Basically a ratio is a figure obtained in the result of arithmetic operationsfrom two financial statement figures, and therefore it is possible to calculate a lot of differentratios. However, only a very small number of ratios imply significant information about thefinancial status of an enterprise. Financial analysis is using ratios in practice to determine theenterprise financial status.Financial analysis uses ratios in practice that can be subdivided into the followinggroups: liquidity ratios; profitability ratios; solvency ratios; asset use efficiency ratios; investment ratios.Each ratio when calculated separately does not give any information about anenterprise. Only a set of ratios and their changes over time as well as the comparison with theindustry average ratios provides valuable information about the financial status of anenterprise. The purpose of the ratio analysis is to calculate the most important ratios and todetermine the dynamics of their changes during the period analysed.Financial ratios show the financial proportions between various statement items. Thecalculation of the financial ratios alone does not provide sufficient information about thefinancial position of an enterprise. In order to analyse the enterprise financial status by usingthe results obtained from the ratio analysis, it is necessary to compare the calculated ratioswith a certain base. The following can serve as bases for comparison:44
Analysis of the Operation and Financial Condition of the Enterprise Generally accepted parameters; Industry average figures; Analogue indicators from previous periods; Indicators from competitor enterprises; Any other indicators form analysis estimates.There are advantages and disadvantages in using every base of comparison: Only for a few ratios any standards or generally accepted measures exist;Besides, the variance of the enterprise indicators from generally accepted standards can beassociated with the specifics of the industry, the specifics of development of businessenvironment or its seasonal character; Often it is not possible to obtain fair information about the industry averageindicators; It is only possible to obtain data about some average data of enterprises that canserve as benchmark data; Comparison of the enterprise ratios with the own indicators only allows toidentify the area of development of the enterprise itself and doesn’t provide any informationabout the ranking of the enterprise within the industry and to compare to its competitors; Only published data can be obtained about the competitor enterprise that maynot be detailed enough in order to form the basis for comparison of indicators; The indicators of any other enterprise analysed include specific enterprise dataaffecting also these indicators.Three different techniques exist for the comparison of financial indicators: comparison with the ideal level (rule-of-thumb measures); comparison to previous periods; comparison to the industry level.Comparison with a benchmark – the calculated indicators (ratios) are comparedto the ideal (desirable) level of these indicators. For example, it is recognised that theacceptable level of the quick ratio could be from 1 to 2, similar benchmarks have beenrecommended also for other ratios. This technique, however, should not be idealised, asthere are no two absolutely identical enterprises and each enterprise has its own specificswhich needs to be taken into account when doing evaluation of financial data. So, forexample, a high quick ratio can be the result of unfavourable crediting policy(insubstantially high amounts of customer debts), too old or obsolete stock etc. In anotherenterprise this liquidity indicator could be considerably lower however if such a situation isthe result of a rational credit policy, the liquidity ratio of an enterprise may as well be high.Therefore, when using the technique of comparison, it has to be done carefully.Comparison with the previous periods gives the opportunity to conclude whetherthe indicators have improved or declined. Such comparison can likewise be useful whenforecasting the enterprise development trends. As the rate of development can vary in thecourse of time, forecasting should be done prudently. One of the drawbacks of thistechnique is also the fact that not always the level of the previous periods is easilycomparable. For example, return on equity has increased in the enterprise over one yearfrom 4% to 6%; this cannot be admitted to be a big achievement as even the 6% return isnot sufficiently high.45
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