23 Mar 2015 11 Dec 2017
One of the best idea to account for analysis is to ask the question' should we invest our money in the company either to buy a small business Or share of existing company before we take such decision there are question we tend to ask ourselves. If the business could be profitable, has there been any growth over some period of time. The best way to answer this question is to do some analysis over the financial income statement and balance sheet for performance evaluation. A technique ratio called financial ratio can get this done.
This is a technique used to describe and interpret the relationship of certain financial data in the financial statements that would otherwise be devoid of meaning. Bendrey et al(2004).
Users of financial Statement
Users of financial statement can be found with and outside the organisation sector of an economy. Most user intend to have full information of the organisation before doing any transaction with them for instance a potential customers may request for special information like annual financial report . Therefore, the use of financial statement is categories under the respective people.
Users information Need
Investors: This help to decide whether there is need to increase and decrease interest of ownership. For making investment risk and return.
Managers: it helps the management to set up managerial goal. The goal like be set in term of increase in profitability.
Customers: this is to know the firms stability and capability to delivered goods and service to be purchased.
Other users they include government in area like Tax, security trading.
Potential suppliers and creditors: They are in rest to know if a company can pay their bills.
Not only should financial statement be interpreted but to also compare it with another financial statement of an organisation in context.
Reason for ratio comparison
Skousen et al(1999) states that . "The standard of comparison used for benchmarking can be used on the performance of the company withinâ€¦."
To determine the performance of a company there will be need for comparison of financial statement of that company either by using the past and the present or with another company financial statement. It is not good enough to compare the financial statement of a company but to also recognise comprising by benchmarking this is because there is need to deal with the inability of recognising any shortcomings and faults.
Economic performance measurement
Most big organisation are separated into divisions where there managers have aggregate responsibility for investment and profit. There is a structure comprising many sections, the relationship that division has should be run so that no division by seeking to increase its own profit can reduce the organisation profit as a whole.
We shall be concerned with the ratios that measure the economic performance, which concentrate not only on profitability, but on range other performances.
RELEVANT RATIOS IN MEASURING THE PERFORMANCE OF AN ORGANISATION
In Davies and Buckskin(2005) outlines various ratios' of which the following shall be used to analyse the performance of Marks and Spencer, & Sainsbury
Profitability ratio: The general primary object is for the organisation to maximise the wealth of the owners of the business. To this two ratios will be discuss under this
Profit Margin: This is a ratio that helps to gain the relationship between purchasing costs and sales revenue of an organisation
Gross margin%= gross margin = Sales-Cost of sales(COS)
ROCE: This measures the return to the owners on the book value of their investment in a company.
Efficiency Ratios: The monitory of efficiency ratios by companies is important because this relate direct to the effectiveness of a business changed into cash for instant if company are not paid in accordance to trading there profit margin may be eroded by financing costs. Therefore resources that have been used will be measure with the following ratios
Stock days (turnover): The number of days that's stock could last. This applied to either total stock or work in progress.
Total stock value
Cost of sales
Debtors Days or trade receivable: This indicates the average time taken in calendar days to receive payment from credit customers.
= Trade debtors x 365
LIQUIDITY RATIOS: This reflects the health position of the business and its liability to meet its short-term obligation. This could be compared by using the following ratios.
Current Ratio: This is an overall measure of the liquidity of the business.
= Current assets
Acid test(times): This indicate the ability of the company to pay its creditors in short-term
=Current - Stock
(D) Gearing Ratio: They are generally concerned with the relationship between debt and equity capital, the financial structure of an organisation.
These ratios are both used in describing the relative proportions of debts and equity used to finance a business.
Long term debts
Equity + long term debt
Interest covered: This ratio calculates the number of times the interest payable is covered by profits available for such payments.
= Profit before interest and tax
(E) Investment ratio: "This indicates the extent to which the business is undertaking capital expenditure to ensure survival." Bockzko & Davies(2005).
Dividend cover: The number of times profit is attributed to equity shareholders covers the dividends payable for the period.
= earnings per share
Dividend per share
Earnings per share: This measures the return per share of earnings available to share holders. Bockzko & Davies (2005).
= profit after tax- preference share dividends
Number of ordinary shares in issue
INTERPRETATION OF THE CALCULATED FINANCIAL RATIO OF
SIANSBURY & MARKS AND SPENCER 20099/2008.
This report will be represented according to the standard set by A CIMA (1990) financial report can be presented as follows:
Limitation of financial ratio
Gillespie et al(1997) States that, " financial statement do not give sufficient information to draw firm conclusions."
Therefore, in interpreting the financial statements of the two companies there is need to bear in mind that the analysis are based on profit and loss accounts and balance sheets which are subject to all the limitations of historical cost accounting. Inflation, specific price changes and differing bases of valuation are likely to distort comparisons
Bendrey,M., Hussey, R., & West, C. (2004) Essential of financial acconnting in business. 1st edition Uk: TJ international.p.341.
Neuman, B.R. & Conner, E.C.(2007) Financial accounting: practical tools for analysing financial statements. 4th edition's: Kendall Hot publishing company
Skousen,K., Albrecht,W.S.,Stice,J.D.,Stice,E.K. & Swain,.M.R(1999) Accounting concept and applications.7th edition.USA:International Thomson Publishing.p308-309.
Balance sheet Retrieved 20th Nov, 2010 available at:
Financial statements Retrieved 20th Nov, 2010 available at:
Income statement Retrieved 20th Nov, 2010 Available at:
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