Analysis of the Operation and Financial Condition of the Enterprise

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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
Analysis of the Operation and Financial Condition of the EnterpriseStock, debtors’, creditors’ turnoverSolvencyInvestment ratiosReturn on shareholders’ equityEarnings per sharePrice / earnings ratio(P/E)***Net profit marginDividend marginDividend coverStock turnover:- amount of sales / stockDebtors’ debts collection period: - accountsreceivable / amount of sales * 365;Creditors’ debts payment period: : - accounts payable/ purchases or cost of sales * 365Ratio of capital provided or the capital gearing ratio:- long-term debt / capital employed 3 ;Interest cover:- profit before interest and tax / interest- profit after tax and interest / total amount ofshareholders’ equity**- profit after interest and tax / number of ordinaryshares in issue.- the price per share which depends on the dailytransactions with shares / earnings that are due forone share and remain constant over the entirefinancial year.- dividends par one share / market price of one share- profit per share / dividend per share* net assets are long-term investments plus current assets minus current liabilities;** total amount of shareholders’ equity is the share capital plus all retained earnings andreserves.*** P/E is the acronym used in English for ‘price/earnings ratio’.Example Data interpretation for Company MBoard of Directors of a limited liability company after analysing the financialposition for the three preceding years were concerned that it was impossible to maintainthe existing level of sales without obtaining any external loan capita. It is required toanalyse the financial activities of the company for the above stated period by using theindustry average figures as well as to study the movement of assets and provide anassessment of the company’s position.The industry average measures have remained constant for the preceding three years andare as follows:Net profit / Net assets 20 %Net profit / Amount of sales 6 %Amount of sales / Net assets3.3 timesGross profit / Amount of sales 20%3 Capital employed = Shareholders’ equity + Reserves + Long-term liabilities85
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