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
10x5x = 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
