Financial management

INTRODUCTION:-
The financial management analysis the companys tactical and conduct financial ratio quantity based
on the annual reports. The grades of the financial ratio quantity are discussed classify strategy
issues faced by the company and their possible financial position. The presentation of a company is
compulsory to know about Profit and loss, financial ratios, balance sheet and trade account of a
company.
ROCE:-
ROCE is basically used to analyze how efficiently a business utilizes its assets and liabilities to
generate profit. A business that has invested more in fixed assets and earns little profit will have
smaller ROCE compare to a business which owns less fixed assets but generates the same amount
of profit. In general it is used to determine how much a business gain from its assets and looses
from its liabilities.
2008 2009 2010
= 40.36% = 32.91% = 33.65%
Interpretation:-
By looking at the ratios of return on capital employed for the year 2008 which was 40.36% it is quite
obvious that the company managed to get a good ratio than the subsequent years because of the
efficient use of its assets with having no long term liabilities but the ratio had fallen down to 32.91%
in the year 2009 and the company took long term loan to increase the assets which lead to the
decline in gross profit and net profit margins in 2009 and 2010.
Conclusion:-The company has to manage its assets well and reduce liabilities in order to earn a high
rate of return on capital employed.
NET PROFIT MARGIN:-
The net profit ratios expressed the company net profit before tax and after tax by deducting all office
expenses from gross profit we get net profit.
2008 2009 2010
= 27.54% = 21.80% = 17.37%
Interpretation:-
The substantial fall in the net profit margin in year 2010 is due to the loan interest payable which
significantly reduces the amount of net profit from the ones in prior years.
GROSS PROFIT MARGIN:-
The gross profit ratio expressed the company gross profit excluding cost of goods sold from sales
then we get gross profit
2008 2009 2010
= 20% = 16.66% = 14.94%
Interpretation:-
In the year 2008 gross profit margin is 20% which reduces down to 16.66% in the year 2009 and in
2010 there is a further reduction of 1.72% which brings the Gross profit margin down to 14.94% this
is because the inventory is held for a long period of time raising the amount of assets and poor
sales.
ASSET TURNOVER:-
All assets have been integrated in the calculation of a company which indicates an extra universal
symbol of how resourcefully a company use its assets to produce sales.
2008 2009 2010
= 2.75% = 2.49% = 2.35%
Interpretation:-
This calculation indicates that the company generates an asset turnover of 2.75% in the year 2008
with the decrease 0.26% in the year 2009 and it continues to go down with a further 0.14%
this brings it down to 2.35% in 2010. Generally, a company making a less turnover requires more
capital either in the form of shareholder or creditors to be able to increase more sales. On the other
hand a company that has a higher asset turnover can turn out a rise in sales with injecting smaller
amount of capital.
DAYS OF INVENTORY SUPPLY:-
A variant of inventory revenue is days inventory delivers. The company calculates the average
number of days sales for the record available.
2008 2009 2010
= 13 days = 17 days = 25 days
Interpretation:-
In 2008 the inventory period was 13 days which has increased by 4 days in the following year 2009
to 17 days and there is a further increase in 2010 by 8 days making it a total of 25 days. By looking
at the inventory period the number of days the stock is being held is growing each year with the
highest number of days in 2010 than in the prior years.
CURRENT RATIO:-
Current assets can be transformed into cash. In a year it contains assets such as cash, short-term
investments, accounts receivable, interest receivable, inventory, and prepaid expenses. The prepaid
expenses never will be changed into cash but will be used up within a year. Current liabilities are the
debts that will be paid. Within a year by providing goods or services and include items such as
accounts payable, the portion of any long-term debt 2008 2009 2010
= 2% = 2.31% = 2.06%
Interpretation:-
Current ratio in the year 2008 was 2% which increased up to 2.31% in year 2009 and went back
down to 2.06% in the year 2010. By looking at this ratio the Company was showing progress from
2008 to 2009.
ACID TEST RATIO:-
The quick ratio is a more fixed liquidity. Or in other way the fact that the numerator contains the
assets that can be turned into cash more quickly.
2008 2009 2010
= 1.68% = 1.97% = 1.73%
Interpretation:-
Acid test ratio in the year 2008 was 1.68% which as showed progress in the following year 2009 up
to 1.97% after the increase in the year 2009 the acid test ratio fallen down to 1.73% in the year
2010. By looking at these figures the company liquidity ratio increase in the year 2009 and than
dropped down to 1.73 in the year 2010. Which is not good for the liquidity ratio?
DEBT RATIO:-
The debt ratio measures the quantity of debt in relation to the total assets of a company. Assets
comes from everywhere both from outsiders or from owners.
2008 2009 2010
= 0.31% = 0.33% = 0.48%
Interpretation:-
Debt ratio in the year 2008 was 0.31% which has increased to 0.33% in the year 2009 and further
increase in the year 2010 up to 0.48%.This computation indicates when companys assets are
finance by creditors. The more this ratio is, the better is the risk that the company may have problem
meeting its debt obligation.
DEBTORS DAYS:-
The number of days on average that it takes a company to receive payment for what it sells
2008 2009 2010
= 27 Days = 36 Days = 59 Day
Interpretation:-
In 2008 the debtors days was 27 days and further increase in the year 2009 up to 36 days which
extended to more 59 days in the year 2010.According to these figures debtors days is continuously
increasing each year therefore the company has to give less time to recover money from debtors for
better liquidity ratio.
CREDITORS DAYS:-
A ratio measuring how long on average it takes a company to pay its creditors. Calculated by
dividing the trade creditors shown in its accounts by its cost of sales, or sales, and then multiplying
by 365.
2008 2009 2010
= 38 Days = 46 Days = 48 Days
Interpretation:-
Every year there is a rise in the number of days required to pay off the creditors which is a healthy
sign but by looking into the number of days the debtors are given to settle there accounts with the
company, the first two years 2008 and 2009 seems ok but the payment is held for longer in the year
2010 by the debtors and the company has to settle its account earlier with its creditors which makes
a significantly affects to the profit for the year 2010
STABILITY RATIOS:-
These ratios concentrate on the long-term health of a business - particularly the effect of the
capital/finance structure on the business:
GEARING RATIOS:-
In universal termdescribinga financialratio that differentiates some form of owner's justice (capital) to
lent funds. Gearing evaluate of financial leverage, representing the level in which a companys
performances are funded by owner's funds against creditor's funds.
2008 2009 2010
= 0 = 0 = 2.17%
INTERPRETATION:-
In the year 2008 and 2009 the gearing ratio was comparatively good because no long term liabilities
were acquired. The company has taken long term loan in 2010 and due to the interest payable on
this loan the gross profit and net profit ratio in 2010 had fallen.
CONCLUSION:-
I have elaborated various formulas of resource management to analyse financial statements. The
financial ratios are used in viewing interaction between the financial statement data. It also
distinguishes with the other companies or analyse the same companies overtime. The company has
to manage its assets well and reduce liabilities in order to earn a high rate of return on capital
employed. Ratios frequently classifies into dissimilar categories. The each category, the ratios
compute general components. The companys effectiveness or proficiency to pay its current debts.
From time to time the terminology of these different categories varies, but even with incompatible
terms, the concepts are the same. For business financial statement ratio is the best device. If you
know how to understand the ratio, they are just another useless numbers. The company has to
manage its assets well and reduce liabilities in order to earn a high rate of return on capital
employed.