Criteria of Evaluating Financial Performance - Presentation - Copy.pptx

This class is to provide students the with tools of evaluation of the company performance

1. Criteria of Evaluating Financial Performance Waleed Baamer Majed Nathem

2. 1. Profitability Ratios  Gross Profit Margin: Indicates the percentage of revenue that exceeds the cost of goods sold.  Net Profit Margin: Measures how much profit a company makes for every dollar of revenue.  Return on Assets (ROA): Shows how efficiently a company uses its assets to generate profit.  Return on Equity (ROE): Indicates how well a company uses shareholders' equity to generate

3. 2. Liquidity Ratios  Current Ratio: Compares current assets to current liabilities to assess short-term financial health.  Quick Ratio: A more stringent measure of liquidity, excluding inventory from current assets.

4. 3. Solvency Ratios  Debt to Equity Ratio: Measures the proportion of debt and equity financing.  Interest Coverage: Indicates how easily a company can pay interest on outstanding debt.

5. 4. Efficiency Ratios  Inventory Turnover: Assesses how efficiently inventory is managed and sold.  Accounts Receivable Turnover: Measures how effectively a business collects its receivables.

6. 5. Market Ratios  Earnings Per Share (EPS): Indicates the portion of a company's profit allocated to each outstanding share.  Price to Earnings Ratio (P/E): Evaluates a company's current share price relative to its per- share earnings.

7. 6. Cash Flow Analysis  Operating Cash Flow: Indicates the cash generated from normal business operations.  Free Cash Flow: Measures the cash a company generates after accounting for capital expenditures.

8. 7. Growth Metrics  Revenue Growth Rate: Measures the increase in a company’s sales over a specific period.  Net Income Growth Rate: Assesses the growth in net income over time.

9. 8. Benchmarking Against Industry Standards  Compare financial ratios and performance metrics against industry averages to gauge competitiveness.

10. 9. Trend Analysis  Evaluate financial performance over multiple periods to identify trends and patterns.

11. 10. Qualitative Factors  Consider management quality, market conditions, regulatory environment, and competitive positioning.

12. Importance of Financial Evaluation It can help provide a comprehensive view of a company's financial performance and guide strategic decision-making.

13. Ratio analysis   Is a method of examining a company's balance sheet and income statement to learn about its liquidity, operational efficiency, and profitability. It doesn't involve one single metric; instead, it is a way of analyzing a variety of  financial  data about a company.

14. Practical 1. Gather Financial Statements. 2. Calculate Key Ratios. 3. Benchmark Against Industry Standards 4. Conduct Trend Analysis 5. Qualitative Assessment 6. Synthesize Findings 7. Make Informed Decisions

15. 1. Gather Financial Statements  Sources: You can find financial statements in:  Annual reports  Quarterly reports  Company websites under investor relations  Financial databases like Yahoo Finance, Bloomberg, or Google Finance  Components:  Income Statement: Shows revenues, expenses, and profits over a specific period.  Balance Sheet: Provides a snapshot of assets, liabilities, and shareholders' equity at a specific date.  Cash Flow Statement: Reports cash inflows and outflows from operating, investing, and financing activities.

16. 2. Calculate Key Ratios  Example Calculations:  Gross Profit Margin: If Company XXX has $500,000 in revenue and $300,000 in COGS:  Gross Profit=Revenue−COGS=500,000−300,000=200,000Gross Profit=Revenue−COGS=500,000−300,000=200,000  Gross Profit Margin=(200,000500,000)×100=40%Gross Profit Margin=(500,000200,000​)×100=40%  Net Profit Margin: If their net income is $100,000: Net Profit Margin=(100,000500,000)×100=20%Net Profit Margin=(500,000100,000​)×100=20% COGS : Cost of Goods Sold.

17. 3. Benchmark Against Industry Standards  Collect Industry Data: Use resources like industry reports, financial websites, or databases to find average ratios for the industry.  Comparative Analysis: For instance, if the average ROE in the tech industry is 15% and Company XYZ's ROE is 18%, it indicates better performance relative to peers. *REO : Real estate Owned.

18. 4. Conduct Trend Analysis  Multi-Year Comparison: Look at the calculated ratios over several years. For example, if XYZ’s net profit margin has increased from 15% to 20% over three years, this indicates improving profitability.  Graphical Representation: Consider using charts to visualize trends, making it easier to spot patterns.

19. 5. Qualitative Assessment  Market Position: Assess the company's competitive advantages, market share, and brand strength.  Management Effectiveness: Research management's track record, strategic decisions, and responsiveness to market changes.  Economic Factors: Consider macroeconomic conditions, such as inflation rates, interest rates, and economic growth, which can impact performance.

20. 6. Synthesize Findings  Report Structure: Organize your findings into sections:  Executive Summary: A brief overview of financial health and key insights.  Financial Ratios: Present calculated ratios and comparisons.  Trend Analysis: Include graphs and charts to illustrate trends.  Qualitative Insights: Summarize key qualitative factors affecting performance.  Recommendations: Provide actionable insights based on your analysis.

21. 7. Make Decisions  Investment Decisions: If XYZ shows strong financial health and growth potential, it may be a good investment.  Strategic Planning: Identify areas for improvement, such as reducing debt or improving inventory turnover.

22. References : https://www.investopedia.com/terms/r/ratioanalysis.asp#:~:text=Ratio%20analysis%20is%20a%20method%20of%20examining%20a,a%20variety%20of%20financial%20data%20about%20a%20company. - https://www.wallstreetprep.com/knowledge/cogs-cost-of-goods-sold/ - https://www.financestrategists.com/wealth-management/financial-ratios/?msclkid=a285520e48491f1328b434e9b3da9d71