The balance sheet connects to income statements, in turn also connected to cash flow statement. Occurrences or a change to the net cash activities of the cash flow statement affects the balance sheet. The balance sheet is useful when estimating the potential of the organization in order for them to achieve there long-term mission. However, cash flow statement displays the exchange of currency among an organization and external agents. For example, the cash flow can be affected when the company purchases products, and if the costs of the products are an outstanding amount in turn it will affect the assets on the balance sheet.
If the income of the business is more than the expenses then the company has made money and vice versa. The figures covered in the income statement are important to its managers and owners, but also to their investors and creditors’.
The pro forma statements are commonly used when applying for a business loan. Typically, the investor will require a business owner to submit a pro forma statement with the loan application. Company’s carrying inventory must have a pro forma statement that would show the impact of the amount borrowed on the current assets and will also show the liabilities on the current balance sheets. This provides management with realistic numbers of the amount of cash required by the company. There are a wide variety of ways one can benefit from the pro forma
Also, which users could be interested in each type of ratio. The data collected has revealed the company’s performance and position. Profitability ratios measure a company’s ability to generate earnings relative to sales, assets, and equity. These ratios assess the ability of a company to generate earnings, profits, and cash flows relative to relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is managed.
These ratios assess the ability of the company to generate earnings, profits and cash flows relative to some metric, often the amount of money invested. They highlight how effectively the profitability of a company is being managed. Common examples of profitability ratios include return on sales, return on investment, return on equity, return on capital employed, return on capital invested, gross profit margin and net profit margin. All of these rations indicate how well this company is performing at generating profits or revenues relative to a certain metric. Solvency ratios this is one of many ratios used to measure a company’s ability to meet long-term obligations.
Being able to track sales compared to the previous years’ numbers is a valuable tool in being able to track business. They use this information to forecast on where they think the business will be heading in the next week, month, or year. If the debt percent gets to high then they need to adjust the amount of liabilities that they have to bring that number down. Knowing the times interest earned ratio allows the managers to know at what percent the company is earning interest on its net income. Investors find this information lucrative because the more expendable cash a company has the more likely they are to pay out in dividends for the stock holders..
Current ratios show relative amount of working capital, while quick ratios show the amount of quick assets by current liabilities. “Ratio analysis is an important and powerful technique or method, general, used for financial analysis. The purpose of financial analysis is to diagnose the information content in financial statements so as to judge the profitability, financial soundness of the firm, and chalk out the way to improve existing performance.” (Ramagopal, 2008) Duke Energy’s Current ratio is 3.54; this is calculated by current assets, 2,049 million, divided by current liabilities, 578 million. There is no current problem with the liquidity in this company. The quick ratio is .33 and this is calculated by cash and accounts receivable, 1,501,000+ 1,316,000 divided by current liabilities, 8,644,000.
Comparative Ratio Analysis of Tootsie Roll Industries and Hershey Comapny A company’s general financial picture can be determined through a ratio analysis. Financial ratios have proved to be a useful tool for management, investors and creditors. Management uses financial ratios to develop ways to improve operating efficiency strategies for future growth and see how they stack up against the competition in their industry. Creditors and investors analyze ratios to determine a company’s financial strength and operating effectiveness in order to loan money or invest in them. Financial ratios have more impact when compared over several years to help identify trends.
D2 – evaluate the financial performance and position of a business using ratio analysis. Ratios analysis allows for a meaningful understanding of published accounts by comparing one figure to another and Ratio analysis also allows for both inter-firm and intra- firm comparisons. Probability is a measure of the profitability of a firm in relation to another It allows a comprehensive assessment of the performance of a firm by comparing one figure to another, it can also see how effective a business is and how good it is at controlling its costs. The ratios to do this are the following; gross profit percentage of sales, net profit percentage of sales and Return on Capital Employed also known as ROCE. If the gross profit falls from one year to the next or is thought to be too low the firm may need to decrease the costs of its purchases or may try to increase the sales without increasing the cost of the goods sold.
f. Free cash flows represent the cash that a company is able to produce after laying out the money required to maintain or grow its asset base. g. Weighted average cost of capital is the average return required by all of the firm’s investors. h. Free cash flows and weighted average cost of capital interact to determine a firms value by looking at the amount of cash needed to grow and amount needed to be paid out by investors.