Analysis of the Operation and Financial Condition of the Enterprise

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4. 4. Activity measuresAnalysis of the Operation and Financial Condition of the EnterpriseThe measures in this group show what is the rate of utilisation of its assets forproduction of goods (provision of services) for sale and, consequently, to make profit.These ratios bear a significant role, because they demonstrate, how quickly assets can beconverted into cash. If the rate of asset turnover increases, it would mean that theproduction potential of an enterprise also increases. Activity measures also allow to assesswhether investments into enterprise assets are not too large or too small. If the investmentsare too large, it may happen, that the resources are tied up in such assets that it would bemore beneficial to use them for other purposes. If the investments are too small, anenterprise may turn out to be incapable of serving its customers or to produce goods at theappropriate level.The rate of asset turnover may be calculated for all assets of an enterprise or forsome of its elements.The most important measures in this group are as follows: Working capital turnover ratio; Stock turnover ratio; Long-term investment turnover ratio; Total asset turnover ratio; Capital turnover ratio; Accounts receivable turnover ratio; Accounts payable turnover ratio.Special attention in analysis of the enterprise sources of financing structureshould be devoted to the type of its layout in the assets. For enterprises with highpercentage of real estate assets a larger share for own resources should be created (in orderfor long-term finance to cover long-term investments). Long-term assets should be createdon the account of long-term investments: own and borrowed. If there are no long-term loanassets at the disposal of an enterprise, then fixed assets and other long-term investments aremade by of own resources. Also, if there is a large amount of unrealisable assets within thecurrent assets, an enterprise must cover them from its equity capital.The turnover period of current assets directly affects the balance sheet structure.Enterprises with high rates of turnover may afford a larger amount of borrowed resourcesand it would not affect their solvency, because it is easier to provide for the inflow of cashassets and to pay for the debts. Relationship between the length of the trading cycle ofproduction and the term of repayment of creditors’ debts is very important. The longer theperiod is, in which the trading cycle of production is serviced by creditors’ capital, thesmaller the share of equity capital of an enterprise involved. Another aspect affecting therelationship between owned and borrowed resources is the cost structure of an enterprise.There are variable costs in the cost structure of every enterprise the amount of whichdepends on the scope of its business operations, as well as fixed costs the amount of whichin a certain stage are not dependent or are little dependent on the scope of operations.Latter includes depreciation, rent and lease payments, salaries payable to the administrative76
Analysis of the Operation and Financial Condition of the Enterprisepersonnel etc. The higher the fixed costs in the structure of the prime cost of the productsare, the higher the risk of insolvency should revenues fall due to some reason. Therefore,for enterprises with a considerable share of fixed costs in the total amount of costs, theamount of equity capital should be higher.Current asset turnover ratio:Current asset turnoverratio=Net turnoverCurrent assets (or the average balance sheet value)(4.13.)Stock turnover ratio shows the rate at which the stock of an enterprise isconverted into cash, thus the number of turning over the assets invested in production stockin one year. The higher the stock turnover rate, the faster the realisation of stock, whichmeans that in the case of necessity the debts can be paid for in a shorter span of time.This ratio is calculated by dividing the production costs of goods sold by theannual average amount of production stock:Stock turnoverratio =Cost of salesAverage stock(4.14.)The figures used here are taken from the income statement. The most usefulwould be to apply the figure for the input of goods (cost of goods according to purchaseprices), because the net turnover is the cost of goods in sales prices. The figures for theseestimates are taken from both the income statement and from the balance sheet.A low level of this ratio means that there are too many assets invested in stockand that there is some capital frozen which does not bring any income, besides, the costsand the risk of storage is increasing. On the other hand, the higher the stock turnover ratio,the less there are assets tied up in stock being the liquid part of the current assets, thestronger is the financial position of an enterprise. Raising of the stock turnover level andreduction of the amount of stock is key if the amount of borrowed capital is high in anenterprise. It is useful to make the level of stock consistent with the amount of sales so,that it is sufficient for meeting the needs of production or those of the customers.This ratio can be also expressed in a number of days and you may learn from it,how many days it takes to sell or to replenish the stock of production:Number of stock days =Number of days in the period (360 or 365)Stock turnover ratio(4.15.)Long-term investment turnover ratio describes what the rate of use of the long-termassets is by which the enterprise assets are being financed. This is estimated by dividingthe net turnover by the amount of long-term investments:77
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Analysis of the Operation and Financial Condition of the Enterprise

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