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ANALYSING FINANCIAL STATEMENT

ANALYSING FINANCIAL STATEMENT


Assessment (analysing) of businesss past, present and anticipated future condition for decision making by using financial ratios.
OBJECTIVE: To identify the weaknesses as well as the strengths of the business

TYPES OF FINANCIAL RATIOS


1. Liquidity Ratios:

Current Ratio (CR) Quick Ratio or Acid Test Ratio Working Capital Stock Turnover Ratio Average Collection Period Debtors Turnover Ratio

2. Activity Ratios:

3. Gearing Ratios: 4. Profitability Ratios:


Gross Profit Margin Net Profit Margin

LIQUIDITY RATIOS
Measure whether the business can repay its bills (financial obligation) on time. 1. Current Ratio = Current Assets Current Liabilities If CR is > than one (1) : it shows that the firm is able to pay its obligation/debts when it falls due or for every RM1 of its current liabilities, the business has more than RM1 of its current assets to repay back the obligation.

CONTD
2. Quick Ratio(Acid Test Ratio)

Quick Ratio = Current Asset Closing Stock Current Liabilities


3. Working Capital

= Current Assets Current Liabilities

ACTIVITY RATIOS
Measure how effectively the firm uses its resources

(assets) to generate sales/revenue. 1. Stock Turnover Ratio = Cost of Goods Sold (COGS) Average Stocks
Average Stocks = (Opening + Closing Stocks)
Its shows how many times the stocks has to be

replaced within an accounting period.

CONTD
2. Average Collection Period = Debtors x 360 days Annual Credit Sales Its measure the average number of days the firm takes to collect from its debtors. If high average; business is not efficient in collecting its debts If low average; business is efficient in collecting the debts

CONTD
3. Debtors Turnover Ratio = Annual Credit Sales

Debtors
The higher the ratio the more efficient the business is in collecting its debtors.

PROFITABILITY RATIOS
Measure the end results of the businesss ability to

produce profits from its resources. The higher the rate > profitable, the business is efficient. 1. Gross Profit Margin = Gross profit x 100 Net Sales
2. Net Profit Margin = Net profit x 100

Net sales