FINANCIAL HEALTH ANALYSIS OF

MICRO AND SMALL ENTERPRISES

.
INTRODUCTION AND DEFINITION
Definition:
Financial health refers to the well being of a business by
adequate financial risk.
It can also be defined as a “Moving Target”.
Finally, we can say’s that “Financial health is the ability to
promote a profits”.
FINANCIAL HEALTH ANALYSIS:

 Financial health analysis means the process of

measuring the overall performance of an
enterprise/micro and small scale enterprise by
using a scientific tools to analysing how efficiently
the resources are being used.

So, a manager needs to monitor’s and maintained

substantially to ensure growth ,enhanced market
share and competitive enough to others firms.
Understanding financial health
analysis
Points which we have taken to discuss:
 What is Financial resources?
 Who provides these resources?.
 How firm used these resources?
 Finally what are the indicators of the financial health?
FINANCIAL RESOURCES
It is a resources which are in the form of cash, incentives ,
assistances and subsidies and others.
Internal sources:
 Undistributed profits:
a)Reserves.
b)Retain earnings:
 Depreciations:
Externals sources:
 Individual:
Families and friends.

 Banks:
Short term and long term sources.

 Financial institutions:
Financial and investment institution.
 Governments:
Concessions, subsidies and bounty.
 Markets:
Securities and Exchange Boards of India set up a separate
platform of exchange having national terminals for small
and medium enterprise in April 2010 ,SEBI laid down a
frameworks in November, 2008.
Finance/Fund
Utilization or Investment of Resources
All the financial resources which are collected from different
sources are employed by a firms to meet it’s objectives and
earned a profits/income.These includes:
1.Fixed investment
a)land.
b)buildings.
c)machineries
2.Researched and development:

These are pre operative expenses. They are used by an

enterprise to know the customer behaviours prior to set
up the development of a products or services, where to set
up an enterprises , at what price they should be sell to the
markets etc.

3.Working capitals.
a)Advance paid to suppliers.

b)Raw materials(direct) by cash

 c)Work in progress and finished goods (pending
sale).

e)Store and spares of machineries.

f)Sundry debtors (sales on credit).

g) wages paid to the workers , fuel, selling expenses

and others.
h)Cash and Bank Balance:
The firms are also required to met urgent needs, such as natural
calamities , extend credit term to customers.
Indicators of financial efficiency
Trading and profit and loss account.
 It is prepared to know the trading result of the business.
 Higher the gross profit, it is better for the enterprise.
 Profit and loss a/c measuring an enterprise profitability(net
profits) over a period of time.
Balance sheet:
 It is a statement showing what we owes and what you owes.
Cash flow statement:
 A modern enterprise considered this statement the best
indicators of evaluating the financial health of an enterprise.
 RATIO ANALYASIS
 Liquidity ratios:
Liquidity ratios

 Solvency ratio:
Solvency ratio
 Liquidity Ratio : A class of financial metrics that is used to
determine a company's ability to pay off its short-terms debts
obligations. Generally, the higher the value of the ratio, the larger
the margin of safety that the company possesses to cover short-
term debts.
 Solvency Ratio:
A key metric used to measure an enterprise’s ability to meet its
debt and other obligations. The solvency ratio indicates whether a
company’s cash flow is sufficient to meet its short-term and long-
term liabilities. The lower a company's solvency ratio, the greater
the probability that it will default on its debt obligations.
 The measure is usually calculated as follows:
 Current Ratio : A liquidity ratio that measures a company's ability to
pay short-term obligations.
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
 Debt Equity Ratio :
A measure of a company's financial leverage calculated by dividing its
total liabilities by stockholders' equity. It indicates what proportion of
equity and debt the company is using to finance its assets.

Note: Sometimes only interest-bearing, long-term debt is used instead

of total liabilities in the calculation.

Also known as the Personal Debt/Equity Ratio, this ratio can be

applied to personal financial statements as well as corporate ones.
 Total Asset to debt ratio:
Total debt to total assets is a leverage ratio that defines the total
amount of debt relative to assets. This enables comparisons of
leverage to be made across different companies. The higher the
ratio, the higher the degree of leverage, and consequently,
financial risk. This is a broad ratio that includes long-term and
short-term debt (borrowings maturing within one year), as well
as all assets – tangible and intangible.
 proprietary ratio (also known as net worth ratio or equity
ratio) is used to evaluate the soundness of the capital structure of
a company. It is computed by dividing the stockholders’ equity
by total assets.
 Interest Coverage Ratio
A ratio used to determine how easily a company can pay interest
on outstanding debt. The interest coverage ratio is calculated by
dividing a company's earnings before interest and taxes (EBIT) of
one period by the company's interest expenses of the same
period
 Activity Ratios:
Activity Ratios

 Profitability ratio:
Profitability ratio
 Activity Ratios :
 Accounting ratios that measure a firm's ability to convert
different accounts within its balance sheets into cash or sales.
Activity ratios are used to measure the relative efficiency of a
firm based on its use of its assets, leverage or other such balance
sheet items. These ratios are important in determining whether a
company's management is doing a good enough job of generating
revenues, cash, etc. from its resources.
 Stock Turnover Ratio :
 A ratio showing how many times a company's inventory is sold
and replaced over a period. The days in the period can then be
divided by the inventory turnover formula to calculate the days it
takes to sell the inventory on hand or "inventory turnover days.
 Debtor Turnover Ratio:
 An accounting measure used to quantify a firm's effectiveness in
extending credit as well as collecting debts. The receivables
turnover ratio is an activity ratio, measuring how efficiently a
firm uses its assets.
 Creditors Turnover Ratio
A short-term liquidity measure used to quantify the rate at which
a company pays off its suppliers. Accounts payable turnover ratio
is calculated by taking the total purchases made from suppliers
and dividing it by the average accounts payable amount during
the same period.

 Working Capital Turnover Ratio

A measurement comparing the depletion of working capital to
the generation of sales over a given period. This provides some
useful information as to how effectively a company is using its
working capital to generate sales.
 Asset turnover ratio :
The amount of sales or revenues generated per dollar of assets.
The Asset Turnover ratio is an indicator of the efficiency with
which a company is deploying its assets.
Gross Profit Ratio:
Is a profitability ratio that shows the relationship between gross
profit and total net sales revenue. It is a popular tool to evaluate
the operational performance of the business . The ratio is
computed by dividing the gross profit figure by net sales.
 Net Profit Ratio : is a popular profitability ratio that shows
relationship between net profit after tax and net sales. It is
computed by dividing the net profit (after tax) by net sales.
 Return On Capital Employed A financial ratio that measures a
company's profitability and the efficiency with which its capital is
employed. Return on Capital Employed (ROCE) is calculated as:
 ROCE = Earnings Before Interest and Tax (EBIT) /
Capital Employed
 Return On Net Worth : The amount of net income returned as a
percentage of shareholders equity. Return on equity measures a
corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested.
 ROE is expressed as a percentage and calculated as:
 Return on Equity = Net Income/Shareholder's
Equity
 Net income is for the full fiscal year (before dividends paid to
common stock holders but after dividends to preferred stock.)
Shareholder's equity does not include preferred shares.
 Also known as "return on net worth" (RONW).
 A ratio that shows the efficiency of a company's management by
comparing operating expense to net sales. Calculated as:
 CONCLUSION:

Financial statements and its ratios are the indicators of the firm
health.

A Micro and Small Enterprises management which have the

knowledge and skill to utilised efficiently the resources are more
profitable or financially health than any others firms.