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Financial Analysis

Financial Analysis is undertaken using the financial ratio. Financial Analysis is the method used to determine how your business is performing and a way of checking the viability of the business.   

Business owners and management use Financial Analysis (ratio) on the Balance sheet's and Incomes statements to make decisions on continuing the operation of the business. 

Some of the main ratios which are used in performing the Financial Analysis are as follows: 

Profitability Ratio 

Profitability Ratio is the net profit divided by the total resources used in the business
Return on total assets = net profit/total assets
If net Profit = 150,000, total asset = 550,000 what is the return of total assets
Return on total assets = 150,000/ 550,000
Return on total assets = 27.2727 

Break even Analysis 

Break even analysis - how many units of my product will I need to meet my expenses?
eg How many units need to be made to break even, if  the fixed unit costs are $80,000 and the variable cost of the item is $5 Per Unit Product  which is then sold for $10.00? 

Total Cost = Total Revenue
Total revenue = fixed cost + cost per unit (X)
Total revenue= 10x
Fixed cost = 80000
Variable cost = 5x
10x = 80000 + 5x
10x-5x = 80000
5x = 80000
X =80000/5
X = 16000

Liquidity Ratio

The Liquidity ratio measures the ability of the business to meet it's current monetary commitments.
Current working capital ratios
Current ratio = current assets/ current liabilities
If current assets = 75000 & current liabilities = 200,000
Current ratio = 175000/200000
= .875
Therefore $1 in current liabilities owed the firm has 87.6 cents in current assets to meet such commitments


Efficiency ratio

Efficiency ratio is the assessment of the efficiency of the business by evaluating the turnover of stock, debtors, this is done by the stock turnover ratio and the debtor turnover ratio

Stock Turnover

Stock turnover= cost of goods sold/average stock
If cost of goods sold = 750,000 and average stock (opening and closing stock /2)= 55,000
Then stock turnover = 750000/55000
Stock turnover =13.63 times per annum

Debtor Turnover

Debtor Turnover = credit sale/debtors
If debtor = 85000 and Credit sales = 1,000,000
Debtor turnover=250,000/25000
= 10

 Average Collection Period 

Average collection period = 365/debtor turnover
Average collection period 365/10
36.5 average debt collection periods is 36.5 days 

These are just some of the most common financial analysis Ratio