Profitability Analysis:
1. How profitable is the company? What accounting policies and practices are followed by the company? Are they stable?
2. Is the profitability (RONA) of the company high/low average? What are the underlying reasons for current profitability? Is it due to:
• Profit Margins
• Asset Utilisation
• Non Operating Income
• Window Dressing
• Changes in Accounting Policy
• Inflationary Conditions
3. Is the return on equity (ROE) high/low/average? Is it due to:
• return on investment
• financing mix
• capitalisation of reserves
4. What is the trend of profitability? Is it improving because of better utilisation of resources or curtailment of expenses of strategic importance?
5. Will the company be able to sustain high profitability or improve the profitability given the competitive and other environment utilisations?
Asset Utilisation:
These types of ratios are basically used to gauge the effective utilisation of assets. Here assets include, both fixed as well as current assets. Through calculating these ratios, we try to find out:
1. How effectively assets are being utilised to generate sales?
2. Are the level of debtors and inventories relative to sales reasonable in view of the firm’s competitive and operating characteristics?
3. What are the trends in collection periods, inventory turnover and fixed assets turnover?
4. Is the improvement in the fixed assets turnover due to:
• depreciated book value of fixed assets?
• disposal of some fixed assets?
Liquidity Analysis:
As already discussed, these ratios are used to predict short term and long- term solvency of the firm. In addition to this, these ratios are also used to analyse the following:
1. What is the level of current assets and liabilities? Is it reasonable in the context of the firm’s business?
2. What is the frequency and duration of payment to the creditors? If it is high or low what is the effect of it?
3. How efficiently and frequently does the company convert its current assets into cash?
4. Given the company’s riskiness and future financial needs, what is the pattern of financing :
• What is the mix of debt and equity?
• What is the maturity structure of debt and is the company faced with large debt repayment in the near future?
5. What are the lease commitments of the firms and the quantum of contingent liabilities?
1. How profitable is the company? What accounting policies and practices are followed by the company? Are they stable?
2. Is the profitability (RONA) of the company high/low average? What are the underlying reasons for current profitability? Is it due to:
• Profit Margins
• Asset Utilisation
• Non Operating Income
• Window Dressing
• Changes in Accounting Policy
• Inflationary Conditions
3. Is the return on equity (ROE) high/low/average? Is it due to:
• return on investment
• financing mix
• capitalisation of reserves
4. What is the trend of profitability? Is it improving because of better utilisation of resources or curtailment of expenses of strategic importance?
5. Will the company be able to sustain high profitability or improve the profitability given the competitive and other environment utilisations?
Asset Utilisation:
These types of ratios are basically used to gauge the effective utilisation of assets. Here assets include, both fixed as well as current assets. Through calculating these ratios, we try to find out:
1. How effectively assets are being utilised to generate sales?
2. Are the level of debtors and inventories relative to sales reasonable in view of the firm’s competitive and operating characteristics?
3. What are the trends in collection periods, inventory turnover and fixed assets turnover?
4. Is the improvement in the fixed assets turnover due to:
• depreciated book value of fixed assets?
• disposal of some fixed assets?
Liquidity Analysis:
As already discussed, these ratios are used to predict short term and long- term solvency of the firm. In addition to this, these ratios are also used to analyse the following:
1. What is the level of current assets and liabilities? Is it reasonable in the context of the firm’s business?
2. What is the frequency and duration of payment to the creditors? If it is high or low what is the effect of it?
3. How efficiently and frequently does the company convert its current assets into cash?
4. Given the company’s riskiness and future financial needs, what is the pattern of financing :
• What is the mix of debt and equity?
• What is the maturity structure of debt and is the company faced with large debt repayment in the near future?
5. What are the lease commitments of the firms and the quantum of contingent liabilities?
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