Financial analysis with Invest Sign

Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible.
This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking.

Purposes and Limitations of Ratios and Ratio Analysis

There are several considerations you must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies.

  If you are making a comparative analysis of a company's financial statements over a certain period of time, make an appropriate allowance for any changes in accounting policies that occurred during the same time.

  When comparing your business with others in your industry, allow for any material differences in accounting policies between your company and industry norms.

  When comparing ratios from various fiscal periods or companies, inquire about the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures.

  Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. In many cases, these adjustments can significantly affect the ratios.

  Carefully examine any departures from industry norms.

In Invest Sign, financial ratios are categorized into four sections:

     Liquidity Ratios

     Activity Ratios

     Gearing Ratios

     Profitability Ratios

Invest Sign allows to export these and other financial reports to selected format (MS word, Excell or others). As example, we exported table, listed below:

Table 1. Financial indexes of project

Liquidity Ratios

While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important to financial managers who must meet obligations to suppliers of credit and various government agencies. A complete liquidity ratio analysis can help uncover weaknesses in the financial position of your business.

Current Ratio (CR): the most common liquidity ratio is the current ratio, which is also the ratio of current assets to current liabilities. It is also expressed as how many times the assets can cover the liabilities. (Current Ratio = Current Assets / Current Liabilities)

Quick Ratio (QR): Quick ratio focuses on immediate liquidity (i.e., cash, accounts receivable, etc.) but specifically ignores inventory. Also called the acid test ratio, it indicates the extent to which you could pay current liabilities without relying on the sale of inventory. (Quick Ratio = [Cash + Accounts Receivable + Any other quick assets] / Current Liabilities)

Net Working Capital: Working capital compares current assets to current liabilities, and serves as the liquid reserve available to satisfy contingencies and uncertainties. A high working capital balance is mandated if the entity is unable to borrow on short notice. The ratio indicates the short-term solvency of a business and in determining if a firm can pay its current liabilities when due. (Net Working Capital = Current Assets – Current Liabilities)

Net Working Capital to Total Asset Ratio: This liquidity ratio, which records net liquid assets relative to total capitalization, is the most valuable indicator of a looming business disaster. Consistent operating losses will cause current assets to shrink relative to total assets (Net Working Capital / Total Assets)

Activity Ratios

Activity ratios also known as efficiency or turnover ratios usually consist of the sales figure in the numerator and the balance of an asset in the denominator. These ratios measure management's effectiveness at using its assets.

Inventory Turnover: he inventory calculates how often the inventory is being used. Generally, the faster inventory is being used the better it is for the business. It is expensive to maintain a large inventory and money (that may be invested elsewhere) are tied up in inventories that are not used. (Inventory Turnover = Cost of Goods Sold / Average Inventory)

Inventory Turnover in days: This ratio identifies the average length of time in days it takes the inventory to turn over. As with inventory turnover (above), fewer days mean that inventory is being sold more quickly (Inventory Turnover in days = 365 Days / Inventory Turnover)

Receivables Turnover: This ratio shows the number of times accounts receivable are paid and reestablished during the accounting period. The higher the turnover, the faster the business is collecting its receivables and the more cash the client generally has on hand (Receivable Turnover = Total Net Sales / Accounts Receivable)

Receivables Turnover in days: This reveals how many days it takes to collect all accounts receivable. As with accounts receivable turnover (above), fewer days means the company is collecting more quickly on its accounts (Receivables Turnover in days = 365 Days / Accounts Receivable Turnover)

Payables Turnover: This ratio shows how many times in one accounting period the company turns over (repays) its accounts payable to creditors. A higher number indicates either that the business has decided to hold on to its money longer or that it is having greater difficulty paying creditors (Payables Turnover = Cost of Goods Sold / Accounts Payable)

Payables Turnover in days: This ratio shows how many days it takes to pay accounts payable. This ratio is similar to accounts payable turnover (above.) The business may be losing valuable creditor discounts by not paying promptly (Payables Turnover in days = 365 Days / Payables Turnover)

Working period in days: Indicates the time between the acquisition of inventory and the realization of cash from sales of inventory. For most companies the operating cycle is less than one year, but in some industries it is longer. (Working period in days = Inventory Turnover in days + Receivables Turnover in days - Payables Turnover in days)

Net Working Capital Turnover on Sales: Indicates the turnover in working capital per year. A low ratio indicates inefficiency, while a high level implies that the company's working capital is working too hard. (Net Working Capital Turnover on Sales = Total Net Sales / Net Working Capital Turnover)

Fixed Assets Turnover ratio (FATR): Measures the capacity utilization and the quality of fixed assets. (FATR = Total Net Sales / Fixed Asset)

Total Assets Turnover ratio (TATR): Measures the activity of the assets and the ability of the business to generate sales through the use of the assets. (TATR = Total Net Sales / Total Asset)

Gearing Ratios

Debt Ratio (DR): this ratio shows what percentage of total funds is provided by creditors. Although creditors tend to prefer a lower ratio, management may prefer to lever operations, producing a higher ratio. (DR = Total Liabilities (or Debt) / Total Assets)

Long term debt – to – total asset ratio: Long term debt / Total Assets.

Long term debt – to – long term asset ratio: Long term debt / Long term Assets.

Debt–to-Equity ratio (DTER): Debt to equity is also called debt to net worth. It quantifies the relationship between the capital invested by owners and investors and the funds provided by creditors. A lower ratio means your client's company is more financially stable and is probably in a better position to borrow now and in the future. However, an extremely low ratio may indicate that your client is too conservative and is not letting the business realize its potential (DTER = Total Liabilities (or Debt) / Net Worth (or Total Equity))

Equity multiplier: Total Assets / Net Worth (or Total Equity)

Debt-to-net sales ratio: Total Liabilities (or Debt) / Total Net Sales.

Times interested earned: the ratio indicates how well the firms earnings can cover the interest payments on its debt (Times interested earned = Earnings before interest and taxes / Interest Charges)

Profitability Ratios

Profitability ratios measure the company's ability to generate a return on its resources. Use the following four ratios to help your client answer the question, "Is my company as profitable as it should be?" An increase in the ratios is viewed as a positive trend.

Gross Profit Margin on Sales: Gross profit margin indicates how well the company can generate a return at the gross profit level. It addresses three areas - inventory control, pricing and production efficiency. A reducing percentage may show company is not increasing prices in relation to costs. (Gross Profit Margin on sales = Gross Profit / Total Sales)

Earnings before interest and taxes margin on sales: Earnings before interest and taxes (EBIT)/ Total Sales.

Net Profit Margin on Sales (NPM): Net profit margin shows how much net profit is derived from every dollar of total sales. It indicates how well the business has managed its operating expenses. It also can indicate whether the business is generating enough sales volume to cover minimum fixed costs and still leave an acceptable profit (Net Profit Margin on Sales = Net Profit / Total Sales)

Return on Total Assets (ROA): this ratio measures the effectiveness of management's use of the organization's assets. This ratio is sometimes referring to as Gross Return on Assets. (ROA = Net income / Total Average Assets)

Return on Short -Term Asset: Net income / (Short -Term Asset).

Return on Long -Term Asset: Net income / (Long -Term Asset).

Return on equity: is the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firms stock. (Return on equity = Net income / Shareholder Equity)