In the business world it is important to be able to evaluate the financial performance of company.Managers and other stakeholders such as suppliers and lenders depend on financial information in order to made decisions. …
In the business world it is important to be able to evaluate the financial performance of company. Managers and other stakeholders such as suppliers and lenders depend on financial information in order to made decisions. The four basic financial statements are the income statement, the balance sheet, the statement of retained earnings, and the statement of cash flow (Weygandt & Kieso & Kimmel, 2002). These statements are published in the annual reports of public corporations. The data contained in the financial statements can be utilized by financial analyst to make financial analysis such as vertical, horizontal, and ratio analysis (Besley & Brigham, 2000). The financial technique that will be analyzed and discussed in this paper is ratio analysis. Ratio analysis can be utilized to analyzed different aspect of the financial performance of an enterprise. There are different categories of ratio analysis. The five ratio analysis categories are liquidity, financial leverage, asset efficiency, profitability, and market value ratios (Peavler, 2011). Financial ratio analysis is a very effective tool because it can be applied to firms of any size including small, medium, and large firms. The functionality of ratio analysis depends on the proper appliance of the generally accepted accounting principles (GAAP) by the accountants of public and private firms. The financial ratios assess how well a company is doing from the standpoint of the stockholders of the firm (Garrison & Noreen, 2003). Ratio analysis is not a complicated method. It can be learned by finance and accounting students taking introductory business courses. There are several advantages to the use of ratio analysis. Five of the advantages of ratio analysis are: a) simplifies financial statements; b) facilitates inter-firm comparison; c) helps in planning; d) makes inter-firm comparisons possible; e) helps in investment decisions (Accountingformanagement, 2011). The seven ratios that I choose to analyze the performance of ParkView Ltd. are net margin, return on assets, return on equity, current ratio, debt ratio, debt to equity, and inventory turnover ratio. The net margin ratio is a profitability ratio. It is considered the best profitability indicator. Net margin is calculated by dividing net income by sales (Investopedia, 2011). The net margin indicator like all other financial ratios can be better evaluated by comparing a firm’s ratio with the industry standard. A good database that provides the business industry ratios of different industries is the Dun & Bradstreet database (Dun & Bradstreet, 2011). Net margins vary depending on the industry. The retail industry has low net margins, while the consulting industry has higher net margins. The second ratio selected was return on assets. Return on assets measures how efficient a company has been in using its assets to generate profits (Thefreedictionary, 2011). A high return on assets is a desirable outcome. The return on assets ratio is calculated dividing net income by total assets. The return on equity metric measures the extent to which financial leverage is working for or against common stockholders (Garrison, et al., 2003). The formula to calculate return on equity is net income divided by total equity. The debt ratio and current ratio are financial leverage ratios. The current ratio calculates the ability of a company to pay off its short term debt, while the debt ratio determines the ability of the firm to pay off its long term debt (Investorglossary, 2011). The current ratio is calculated dividing current assets by current liabilities. The debt ratio is calculated dividing total debt by total liabilities. The debt to equity ratio measures the amount of assets being provided by creditors for each dollar of assets being provided by the stockholders. The debt to equity ratio is calculated dividing total liabilities by total equity (Buzzle, 2011). The inventory turnover ratio is calculated dividing cost of goods sold by average inventory balance. This financial metric measure how many times ...
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