Analysis of the Operation and Financial Condition of the Enterprise

Analysis of the Operation and Financial Condition of the Enterpriseperiod is made up of a capital of varying sizes which has accumulated over many years. Byusing the average value of the total capital we may compensate for this inconsistency.The higher the share of the equity capital in the total, the higher is the financialstability of an enterprise.Therefore, the next measure of financial profitability is the return on equity(ROE). This measure allows to identify the efficiency of use of the capital which has beeninvested by the enterprise owners. This ratio is calculated as follows:Return on own equityAnnual profit 100 % (4.30.)Own equityFrom the owners’ perspective this is the most important measure of return. Anyincrease in this ratio evidences an increase in the efficiency of employment of all forms ofequity. This gives the opportunity to raise the level of dividend payout, to provide moreassets for investment. It should be noted that such a statement is only grounded if the shareof equity in the financing of the assets is constant or increasing.The values of return on capital employed and return on equity are different. Thisis related to the use of the debt capital for which an enterprise should pay interest and themore the enterprise uses the borrowed capital, the larger is the amount of interest payable.In Table 4.1 a summary of the above discussed as well as other financial analysisratios (investment ratios). These ratios are used in performance of the express analysis.Table 4.1Financial performance ratiosReturn on net assets:Primary ratioProfit or income before interest and tax / net assets*Secondary ratiosProfit margin:- profit or income before interest and tax / amount ofsales;Asset turnover:- amount of sales / net assetsThird level ratiosControl over revenues and costs:- gross profit / amount of sales;- variable costs / amount of sales;- fixed costs / amount of sales;Use of assets:- fixed assets / amount of sales;- working capital / amount of sales.Financial performance measuresLiquidityCurrent ratio:- current assets / current liabilities;Quick ratio or the ‘acid test ratio’: cash plus accountsreceivable / current liabilities.84