Assignment: Understanding the Concepts - Research Paper Example

It is of great significance that the ratios must be benchmarked against a standard in order for them to possess a meaning. Keeping that into account, the comparison is usually conducted between companies portraying same business and financial risks, between industries and between different time periods of the same company. The financial performance of the company over the last five years has been conducted in order to draw attention to various financial trends and significant changes over the period.

The analysis is divided into three main categorize namely Profitability, Liquidity and Gearing. Profitability ratios identify how efficiently and effectively the company is utilizing its resources and how successful it has been in generating a desired rate of return for its shareholders and investors. Liquidity ratios measure the ability of the company to quickly convert its asset into liquid cash to settle its short term liabilities. Whereas, the Gearing ratios identifies the extent to which the company is financed through debt and to what degree the operations are being conducted from the finance raised through raising equity capital or otherwise.

The profitability analysis of an entity is crucial as it shows how well a company is managing its resources in order to generate enough return for the shareholders and enhancing the market worth of the company. Three major ratios in this category is used namely ‘Return on capital employed’ Gross profit margin’ and ‘Net profit margin’. (2) The board of directors of the company needs to decide whether the funding should be equity based or debt based. Both modes of financing i.e. equity and debt have their own advantages and disadvantages.

There are several factors which need to be considered before taking such decisions. For example statutory rules and requirements, terms and conditions imposed by the counter party and general economic conditions are analyzed before selecting one of the options. One of the major drawbacks of raising finance equity through issuance of equity is the fact that a lot of secretarial procedure is involved in raising such finance in contrast to acquiring financing directly from any bank. [Abeysinghe, R. L., 2007] Most of the time, financing from any bank or financial institution is acquired by just filing an application with the bank or financial institution.

The banks usually have their own procedure of screening where they evaluate the credit history, financial outlook, liquidity and other aspects of the company. Most importantly, the bank’s analyze the fact and ability of the company pertaining to the ability of the company to repay the amount of loan in the future. When it comes to raising finances through issuance of equity shares, the company is liable to fulfill several requirements such as making sure that a certain number of shares are issued in accordance with the listing regulations of the stock exchange, submitting a due diligence report to the share holder and issuing share to the current shareholder in accordance with their current share holding. [Saching.com (2010)] These statutory rules and requirements are implemented by the authorities responsible in order to safeguard the interest of the organization and general public,