The Measurement Levels of Liquidity, Solvency, Stability, and Profitability.pptx

In this presentation, businessmen and shareholders will know the levels of liquidity, solvency, stability and p profitablity ratio of a certain company. They can have a snapshot of wether they will contnue to invest in a certain business or not.

1. Simple recall! What are the contents of the financial statement? (1-4) What are the three major sections in the Statement Cash Flow?

2. In your barangay/municipality, give at least three examples of businesses which you think are very profitable and three examples of businesses that you think are not profitable.

3. Guide Questions: Why businesses have different levels of profitability? 2 . If the business is profitable could we say that it is liquid, solvent and stable business? Why?

4. Analysis and Interpretation of Financial Statements

5. The Measurement Levels: Liquidity, Solvency, Stability, and Profitability

6. Objectives: 1.Define the measurement levels, namely, liquidity, solvency, stability, and profitability; 2.Differentiate the measurement levels, namely, liquidity, solvency, stability, and profitability ; 3. Appreciate the importance of identifying the measurement levels, namely, liquidity, solvency, stability, and profitability.

7. What is Financial Analysis and how important is it? Analysis of Financial Statements is the selection, evaluation, and interpretation of financial statements data, along with other pertinent information, to assist in investment, financial decision making and to show how and where to improve the performance of the business.

8. What is Financial Analysis and how important is it? The analysis of Financial Statements is an evaluation of: • A firm’s past financial performance • Its prospects for the future

9. Can be Used both internally and externally 1.Internally to examine issues such as employee performance, the efficiency of operations and credit policies. 2.Externally to examine potential investments and the credit worthiness of borrowers, among other things.

10. Financial Abalysis It points to the financial destination of the business in both the near future and to its long-term trends. It show a firm’s liquidity, debt and profitability. It can also show how investors perceive the firm. It can likewise help detect emerging problems and strengths In analyzing the past performance, analysis helps determine the strategy of a company in order to move forward.

11. Financial Analysis Financial Statement (FS) Analysis is the process of evaluating risks, performance, financial health, and future prospects of a business by subjecting financial statement data to computational and analytical techniques with the objective of making economic decisions(White et.al 1998).

12. Measurement Levels Financial ratios are one of the most common tools of managerial decision making . It involve the comparison of various figures from the financial statements in order to gain information about a company’s performance . It is the interpretation, rather than the calculation, that makes financial ratios a useful tool for business managers.

13. What is Ratio? A ratio is a comparison of number to another-mathematically, a simple division a simple division problem. It may serve as indicators, clues, or red flags regarding noteworthy relationships between variables used to measure the firm’s performance in terms of profitability, asset utilization, liquidity, leverage, or market valuation.

14. The most common ratios for the following measurement levels are: 2. Solvency Debt to asset Ratio Debt to equity Ratio Equity Ratio Liquidity a. Current Ratio b. Quick Ratio c. Working Capital Ratio

15. The most common ratios for the following measurement levels are: 3. Stability Ratio Debt to Equity Ratio Interest Cover Ratio 4. Profitability Ratio Gross Margin Ratio Operating Margin Ratio Net Income Margin Ratio Return on Asset (ROA) Return on Equity (ROE)

16. 1. Liquidity Ratio Liquidity- the company’s ability to pay debts that are coming due/ short term debt. A. Current Ratio- the ratio of current assets to current liabilities, meaning the firm’s ability to pay its current debt.

17. Example:

18. Interpretation:

19. B. Quick ratio Is also called Acid Test Ratio- is a stricter measure of liquidity. It does not consider all current assets, only those that are easier to liquidate such as cash, cash equivalents, short term investments, or marketable securities and accounts receivable are referred to us quick assets. Quick assets are current assets that can be converted to cash within 90 days or shorter period.

20. Example:

21. Interpretation:

22. Working capital Ratio

23. Example:

24. Solution:

25. Practice!

26. Assessment!

27. 2. Solvency Solvency -Pertains to the company’s capacity to pay long term debts or liabilities. Debt to Asset Ratio- it pertains to the ratio of total debts to total assets. It shows a company’s ability to pay offs its liabilities with its assets.

28. Example:

29. Solution:

30. B. Debt to equity ratio It pertains to asset ratio of the total debt to owner’s equity/shareholder’s equity ( Assets-liabilities=Equity)

31. Example

32. Solution:

33. C. Equity Ratio It pertains to the ratio of the business assets that are financed by capital. A high ratio shows a high level of capital.

34. Example:

35. Solution:

36. Practice!

37. Assessment:

38. 3. Stability Stability- It is the long-term counter part of liquidity or the company’s ability to be structurally firm and can support its long-term debts by its equity. A. Debt to equity ratio- it pertains to the ratio of total debt to owner’s equity/shareholder’s equity ( Assets - liabilities = Equity)

39. B. Interest cover ratio Interest Cover Ratio- it shows how many times a business interest expense on it’s loans/credits are covered by its operating profit. The higher multiple the better.

40. Example:

41. Solution:

42. 4. Profitability Profitablity - the company’s ability to convert its sales into cash flows and profit. Gross margin ratio- it is the ratio of gross profit to sales ( Gross profit= Sales- Cost of goods sold).

43. Example:

44. Solution and interpretation:

45. b. Operating margin ratio Operating margin ratio- It is the ratio of operating profits to sales ( Operating profit=Gross profit-Operating Expenses)

46. Example:

47. Solution and interpretation:

48. c. Net income margin ratio Net income margin ratio- it is the ratio of net income margin to sales ( Net income= Operating profit-interest and taxes) also referred to as Profit Margin Ratio. It measures how much net profit is produced at a certain level of sales.

49. example

50. Solution and interpretation:

51. d. Return on asset ( roa ) Return on asset ( ROA)-, it is the ratio that measures the peso value of income generated by using the business assets.

52. Example:

53. Solution and interpretation:

54. Interpretation:

55. e. Return on equity( roe) ROE- measures the return ( net income) generated by the owner’s capital invested in the business. Similar to ROA, the denominator of ROE may also be total equity or average equity.

56. Example:

57. Solution and interpretation:

58. Assessment!

59. assessment

60. Match it!

61. Assesment !

62. Thank you for cooperating… GOD BLESS US ALL….