- Published: November 24, 2021
- Updated: November 24, 2021
- Language: English
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Profitability and efficiency are two important aspects for an entity, and an analyst would analyze these two aspects in order to analyze the loopholes of an entity. Financial Statement Analysis (FSA) is an important type of valuation that used by the analysts in order to analyze the level of efficacy of an organization (Blaug & Vane, 2003). FSA is termed as the analysis of the financial statement that usually associated with income statement, balance sheet, cash flow statement and changes in equity. All of these four elements are essential to analyze the main holes of the company. FSA merely used by the shareholders in order to analyze the feasibility of the company in terms of investment is concerned (Fabozzi, Peterson Drake & Polimeni, 2008).
The main theme of this particular assignment is to make an analytical report on the basis of the financial statement of the company. There is case study type of assignment, in which the financial information of a bank has been given, and on the basis of different ratios, the effectiveness of this financial information would have been analyzed (Finkler, Ward & Baker, 2007). There are four different aspects that will be taking into account for the analysis, and these aspects are liquidity, activity, profitability and leverage. Apart from that a short summary of the overall financial position of the company and its recommendation will also be required to include in the assignment.
Analysis & Findings
There are four different elements that deem important for the sake of an entity and analysis, and all of these ratios will be taken into consideration for the analysis.
Every corporation in this world is focusing on enhancing its profitability and economic prosperity with a positive node. However, accomplishing the same aspect is not at all an easy task for the organizations but effective strategies and management of employees in a positive manner can work accordingly in this provision. Though, there are number of ratios that could be used in the same aspect, but there are two ratios (Net Profit Margin and Gross Profit Margin) will be used in this analysis (Finkler, Ward & Baker, 2007).
Net Profit Margin (NPM)
The division of net income divided by sales is known as NPM. The higher the NPM of the company, the higher will be the effectiveness of the company. The analyses of two years are as follows
Gross Profit Margin
A margin that analyzes the proportion of earned gross profit on the revenue of the company is known as Gross Profit Margin (GPM). It is an important ratio for the investors to analyze the financial position of an entity, and the analysis is as follows (Finkler, Ward & Baker, 2007)
Activity Based Ratios
Activity ratios are some of the major kinds of Efficiency ratio analysis, and it is equally beneficial for the sake of the companies in order to get the things in the right manner (Finkler, Ward & Baker, 2007). In terms of efficiency and activity, there are two important ratios that used by the companies to accomplish the same aspect in an effective and organized manner.
Return on Assets (ROA)
Return on assets (ROA) is an important ratio that used to evaluate the level of efficacy of an organization in terms of utilizing its net or operational assets (Moyer, McGuigan & Rao, 2005). The higher the ROA, the higher will be the assumption that the company is doing an effective job to maintain their assets.
Return on Assets (ROA) is an important measure that analyzes the level of efficacy of an entity in terms of analyzing their operational assets in particular. The ROA of the bank which was 13. 73% that increased by 16 basis points in the financial year 2013, due to the increment in the total asset provisions by 10. 66%. The average ROA of the company is 13. 74%, showing that the bank is able to generate net income amounting to $ 13. 74 from the net assets having worth of $ 100 in particular. This particular aspect is in the favor of the company.
Return on Equity (ROE)
Apart from ROA, there is yet another ratio that comes under the umbrella of activity ratio is known as Return on Equity (ROE) (Moyer, McGuigan & Rao, 2005). It analyzes the stance of a company as far as maintaining the stance of their shareholders. The higher the level of ROE, the more productive and effective an organization will be in terms of utilizing the money of the shareholders for their success. The computed ROE for years (FYs) 2012 and 2013 are as follows
This particular analysis is also in the favor of the company, as it is showing that the bank is able to utilize the funds of their shareholders in an effective manner. The ROE of the company in the financial year 2012 was computed as 24. 53% which increased by 1. 9% in the financial year 2013 to reach on a level of 26. 53%. Shareholder’s equity of the company actually increased by 2. 45% in the fiscal year 2013, that shows that more investors parked their money in the stocks of the company in the year 2013. The average ROE of the bank is 25. 53%, showing that the bank is able to generate an income of $ 25. 53 from the net investment of the shareholders worth $ 100.
Liquidity Ratio Analysis
In the field of finance, the term liquidity is known as the provision of an asset that can be changed into cash is known as Liquidity Ratio Analysis (Moyer, McGuigan & Rao, 2005). It is an important provision from the viewpoint of an organization. There are two important ratios that come under the ambit of Liquidity Ratio, known as Current Ratio Analysis (CR) and Quick Ratio.
Current Ratio Analysis
A ratio that is specifically used to compare the current assets with the current liabilities of a company is known as Current Ratio (Peterson Drake & Fabozzi, 2006). According to psychological aspect, the current ratio should not be lower than that of the level of 1: 1. If it is lower than this level, then it shows that the company is selling some of its inventories to meet with its financial obligations
It is same as current ratio; however the inventory would be subtracted from the current assets (Peterson Drake & Fabozzi, 2006). The quick ratio of the company for two consecutive years are computed below
The bank has no inventory, as it usually found in the manufacturing organization; therefore the QR would remain the same as CR.
Ratios that used to analyze the capital structure of an organization, and availability of risk is known as Leverage Ratios (Peterson Drake & Fabozzi, 2010). There are two ratios which will be used in this particular ambit as well, which are debt to equity ratio and financial leverage
Debt to Equity (D/E) Analysis
Debt to equity ratio is an important ratio that analyzes the leverage of a company accordingly. It is a combination of debt and equity in particular (Vandyck, 2006). The computer D/E of the company is as follows
Financial leverage will be analyzing by subtracting total liabilities from total assets to maintain its position accordingly (Peterson Drake & Fabozzi, 2010)
This particular analysis is showing that the financial leverage of the company is in the positive node, which is a positive sign for the company.
Summary of Analysis
The financial statement of the bank has been analyzed in an effective manner, with the help of eight (8) different ratios which have been categorized into four different categorizes like profitability, activity, leverage and liquidity. All of these categorizes are essential for the analysis purpose, and it is computed that all of these categorizes are in the favor of the company. The profitability analysis is showing that the company is high active and effective in terms of generating revenue and net income. Apart from the profitability, the most interesting aspect that associated with the bank is their stance to manage their assets accordingly. Both activity based ratios are in the favor of the companies which are Return on Assets (ROA) and Return on Equity. The liquidity ratio is also lying in the favor of the bank, as the quick ratio and current ratio is showing that the company is effective in terms of meeting with its short term financial obligations, and they don’t have to sell any of the inventories. Leverage ratio somewhat not in the favor of the bank, but it will not be an issue for the company, as they will overcome on this issue soon.
Every analysis will be done on the basis of having investment recommendations on them. After a critical analysis of the bank from four different angles, it is calculated that the financial position of the company is effective, and it will certainly give benefits to its investors in the future. Therefore, investors are recommended to Park their money in the Stocks of the company for better return in future.
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Fabozzi, F., Peterson Drake, P., & Polimeni, R. (2008). The complete CFO handbook. Hoboken, N. J.: John Wiley & Sons.
Finkler, S., Ward, D., & Baker, J. (2007). Essentials of cost accounting for health care organizations. Sudbury, Mass.: Jones and Bartlett Publishers.
Moyer, R., McGuigan, J., & Rao, R. (2005). Contemporary financial management fundamentals. Mason, Ohio: Thomson/South-Western.
Peterson Drake, P., & Fabozzi, F. (2006). Analysis of financial statements. Hoboken, N. J.: Wiley.
Peterson Drake, P., & Fabozzi, F. (2010). The basics of finance. Hoboken, NJ: Wiley.
Vandyck, C. (2006). Financial ratio analysis. Victoria, B. C.: Trafford.