Analysing Financial Performance
Analyzing financial performance involves evaluating a company's financial health and effectiveness in generating profits. This process typically includes assessing key financial ratios, such as profitability, liquidity, and solvency, to gauge the company's overall performance and identify areas for improvement. By examining financial statements and performance indicators, businesses can make informed decisions to optimize their financial strategies.
6 Key excerpts on "Analysing Financial Performance"
- Michael Chibili(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...This summary of activities is done in monetary terms. The income statement presents the revenues and expenses related to a particular period, the balance sheet gives an insight into the financial worth of the organization at a given date. The SCF shows how cash was generated or used during a certain period within the organization while the statement of retained earnings indicates how the net profit generated is either distributed as dividends or ploughed back into the company as reserves. For financial statements to be meaningful they have to be analyzed because just having the financial statement figures on their own does not generally answer all the questions of concerned stakeholders. Analyzing financial statements involves examining relationships between the financial figures and the tendencies that these figures show over time. A primary purpose of financial statement analysis is to review the past performances of a company and see how this can be used to predict the company’s future performance. This particular purpose is considered as the forecasting function of financial statement analysis. Secondly, financial statement analysis permits a company to review its performances in order to be able to identify areas that need special attention. This is considered as the problemsolving function of financial statement analysis and it is historical in nature. The relationship between financial statement figures are called financial ratios and these are discussed in chapter 7. In general, the more thorough the analysis that is carried out, the more realistic the information generated from the analysis will be. The following financial statements of the Europa Alliance Hotel Plc. (Exhibits 6.1 – balance sheets, 6.2 – income statements, 6.3 – cash flow statements, 6.4 – other information, 6.5 – condensed F & B departmental statement) will be used in all the analyses that will follow in this chapter. Exhibit 6.1 Balance sheets of The Europa Alliance Hotel Plc...
eBook - ePub- David Campbell(Author)
- 2003(Publication Date)
- Routledge(Publisher)
...If we were, for example, to identify a strong sales growth of 10% a year in a longitudinal analysis of Company A's financial statements, we might be tempted to think that the company was performing well. If we were then to compare this company with one of its competitors, only to find that the industry average rate of growth was 15%, then we would wish to modify our initial assessment of Company A's performance. Key concept Financial statements One of the conditions placed upon limited companies is the requirement to file an audited annual report and accounts. There are five compulsory components to this document as set out in the UK in the Companies Act (1985 as amended): chairman's statement, auditor's report, profit and loss statement, balance sheet and cash-flow statement. The accounting rules by which they are to be constructed are prescribed in financial reporting standards to ensure that all companies mean the same thing when they make an entry in one of the statements. When they are completed (following the end of the company's financial year), they become publicly available. Each shareholder has the right to receive a copy, and a copy is lodged at UK Companies House in Cardiff or London (or Edinburgh if it is a Scottish company). It is for the purposes of comparisons of this nature that cross-sectional analyses are important. As well as comparing accounting numbers such as turnover, it is often helpful to compare the ratios (see next section) of two or more companies, such as return on sales or one of the working capital ratios. Ratio analysis The third important tool in the analysis of company performance is ratio analysis. A ratio is a comparison (by quotient) of two items from the same set of accounts...
eBook - ePubShow Me the Money
Writing Business and Economics Stories for Mass Communication
- Chris Roush(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...5 Evaluating a Company’s Financial Performance Income Statements and Balance Sheets A company is in operation to make money. If it is not making money, it needs to change its business in a way that enables it to be profitable. But how does one determine whether a company is making money? Public and private companies provide charts of financial numbers to the SEC and state regulatory agencies that are important to read and analyze. One is called the income statement, and the other is called the balance sheet. Both are equally valuable in the information they contain and the story they convey about a company’s performance. Yet, too often, business writers focus on the income statement and ignore the balance sheet, as well as the cash-flow statement. An income statement is a chart that records a company’s financial performance. To the experienced reader, the income statement tells dozens of stories and gives plenty of clues about a company’s financial performance. It details a company’s sales, its expenses and its profits. A company typically provides its income statement for a three-month period, known as a fiscal quarter, and compares the performance in that time with the same three months of the previous year. Analysts should not compare one quarter with the previous quarter. The comparison may not be valid, particularly if a company’s business is seasonal. For example, Coca-Cola sells more soft drinks in the second and third quarters of the year than it does in the first and fourth quarters. Why? It is hotter in the second and third quarters, so people purchase more soft drinks. An income statement is an important barometer of a company’s success and health. A business reporter should review the performance in the income statement and compare the growth rates of revenues, expenses and profits with each other. If revenues are growing faster than profits, one interpretation of those two numbers could be that a company is cutting the cost of its products...
- Daniel W. Halpin, Bolivar A. Senior(Authors)
- 2011(Publication Date)
- Wiley(Publisher)
...Chapter 3 Analyzing Company Financial Data Introduction Every financial report tells something about a company's financial health. If the company reports a large profit, it may be a better investment than another that reports a smaller profit. But which one is better also depends on other factors. If a company makes one million dollars in annual profit by performing 100 million dollars of work, and another company can make a half a million dollar profit on 25 million dollars of work, it would seem that the latter is a more attractive investment, since the first gets one cent in profit from each dollar of work performed, while the second gets a five-cent profit on each dollar of work performed. The rationale above seems solid, but in fact it wouldn't be wise to act based solely in the information provided so far. What if each company had the same amount of owners' equity, say five million dollars? From our perspective as investors, the first company now appears to be better: for each dollar invested, the first company gives a profit of 20 cents to the company's owners, but the second company gives only 10 cents on the dollar to the owners. The decision can get even more complicated. What if the second company has been a quite consistent money maker over time, while the first one has had an erratic record, losing money in some years? Or if the second company has a 50 million dollar bank note due in two years? Or if either company is making less profit than its competitors? It is virtually impossible to judge the financial status of a company just by looking at its Balance Sheet, Income Statement, and other primary financial reports without some further point of reference. This chapter addresses standard metrics, or indicators, for analyzing a set of financial documents...
eBook - ePubThe Five Rules for Successful Stock Investing
Morningstar's Guide to Building Wealth and Winning in the Market
- Pat Dorsey(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...6 Analyzing a Company—The Basics NOW THAT WE have the basic tools of financial statement analysis in hand, we can start tearing into companies. Because this can be a daunting task, I suggest that you break down the process into five areas: 1. Growth: How fast has the company grown, what are the sources of its growth, and how sustainable is that growth likely to be? 2. Profitability: What kind of a return does the company generate on the capital it invests? 3. Financial health: How solid is the firm’s financial footing? 4. Risks/bear case: What are the risks to your investment case? There are excellent reasons not to invest in even the best-looking firms. Make sure you look at the full story and investigate the negatives as well as the positives. 5. Management: Who’s running the show? Are they running the company for the benefit of shareholders or themselves? This is such a critical topic that I’ve devoted an entire chapter (Chapter 7) to it. One word of caution: In this chapter and the next, we’ll be concerned only with evaluating the quality of the company. However, this is only half the story because even the best companies are poor investments if purchased at too high a price. We’ll cover how to evaluate stocks in Chapters 9 and 10, where I’ll show you how to estimate the right price to pay for a company’s shares. Growth The allure of strong growth has probably led more investors into temptation than anything else...
eBook - ePub- David Butler(Author)
- 2012(Publication Date)
- Routledge(Publisher)
...Chapter 9 Evaluating Chapter 9 financial Chapter 9 performance In the same way that in the foregoing chapters we have examined and systematically evaluated the performance of the business in relation to its operating environments, its resource requirements, its sales and marketing performance, its managerial capabilities, and its staff management, we now have to look more closely at the financial performance to date, and the financial systems the business currently employs. In terms of the revised vocational standards, this process relates to Units A2, G1 and G4. If anything, financial performance has got to be one of the easier areas to evaluate, because it is measured against what is essentially factual information, but in practice this is not simply a case of just comparing the factual data on a year-on-year basis. Such comparisons only tell the analyst about what is happening within the organization over a period of time, and not what is happening in a wider context, i.e. how the business is performing in the market environment, and how it is performing in the light of changes in that market. Achievement cannot just be assessed by actual performance alone, it has to be assessed in relation to the market environment in which the organization operates. For example, a business that has sales of £1 million in a market worth £10 million in 2001 has a 10 per cent share of the market. However, if in 2002 the sales increase by 10 per cent to £1.1 million, but the overall market size grows by 20 per cent to £12 million, then although the company's sales have grown significantly, its overall market share has decreased from 10 to 9.17 per cent, as rival businesses must have gained a greater market share during the year. In the 1990s, there was a popular move towards benchmarking as a means of evaluating organizational performance, particularly in the public sector...
