Analysis of the Operation and Financial Condition of the Enterprise

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