These ratios will be calculated from the income statement, balance sheet and statement of cash flows Liquidity Liquidity Ratios measure a company’s ability to meet its short-term debt obligations without disrupting normal operation. The higher the ratio the better a company will be at meeting its short-term obligations as well as have extra cash to cover any unforeseen cash requirements. The liquidity measures we will use are the current ratio, current cash debt ratio, inventory turnover, average days in inventory, receivable turnover ratio and average collection period. The current ratio measures the company’s ability to pay its short-term liabilities (payables and debt) with short-term assets (cash, receivables and inventory). Tootsie Roll exceeds its ability to meet short-term debt obligations with $3.45 in current assets for every $1 in current liabilities.
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.
A shareholders role is to invest money into the business to ensure that it is running efficiently and the way it should be running. They are interested in a good return in investment and how much profit the business makes. They mainly care about how much profit that is made by the organisation/business. Also, the other main thing that shareholders might want is to see their share of profit increasing and the value of their business rising. They influence and impact the business because the business may need money for it to keep running.
The four financial statements therefore assist them to determine if their resources are being put into efficient use since this provides an indication of whether there is any risk they will end up losing the invested funds (Debarshi, 2011). Potential shareholders also rely on the financial statements to make a comparison of the performance of different entities before making important investment decisions (Taparia, 2004). Creditors Creditors supply goods and services to businesses on credit. They are mainly concerned with the liquidity of the firm and its ability to meet their obligations when they are due (Debarshi, 2011). They therefore rely on the balance sheet and income statement to determine the profitability and liquidity levels of different firms in order to make well grounded decisions relating to whether to go ahead and advance them goods and materials on credit (Debarshi,
3) The sales budget is to estimate the profitability. As we know, sales budget is used to structure the company in a way to maximize profits. With an accurate projection of future sales, the company is actually can save the expenses and protects the company from failing. If the sales projection is overstated, the president has to decide whether to proceed or to have other alternative planning.
Profit maximisation is assumed to be the objective of a firm, however there are other objectives that firms have, these include: revenue maximisation and sales maximisation. A firm aiming to maximise profit will aim to operate at output level Q, where Marginal Revenue (MR) is equal to Marginal Cost (MC). A process that companies undergo to determine the best output and price levels in order to maximize its return. The company will usually adjust influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal. There are two main profit maximization methods used, and they are Marginal Cost-Marginal Revenue Method and Total Cost-Total Revenue Method.
Cash flow is more vibrant and holds to the true value. Cash flow is concerned with the movement of money in and out of a business. The concept of accounting profit can be somewhat narrow with its results only looking at income and expenses at a certain point in time and is taxable. By comparing the information provided from the two reports the free cash flow information from will provide the company with a much truer understanding how the project will be performed. Comparing the company’s net income to its actual cash generated, an investor can determine whether the company is more aggressive or conservative in accounting for its performance.
The Home Depot cash flow shows significant net earnings and the cash flow statement does not indicate a drastic drop from previous years. A potential investor would find this information important when evaluating the company. This information would allow investors an insight into how The Home Depot manages its cash in light of potential losses in the revenue
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.
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.