[vc_row][vc_column][vc_column_text]<\/p>\n
The purpose and importance of ratio analysis are to evaluate or analyze the financial performance of the company in terms of risk, profitability, solvency, and efficiency. It helps us to understand the health condition of a company by getting the information from financial statements.<\/p>\n
There are 2 kind of profit margin in the income statement which are gross profit margin and\u00a0 net profit margin. Both of these margin is to determine the amount of the company able to earned after deduction of the cost. Liquidity ratios is determine whether the company able to meet is short-term obligation. There are 2 methods to determine the liquidity of the company which is current ratio and quick ratio. Profitability ratios consist of return on assets (ROA) and return of equity (ROE). Both is to determine the contribution of assets or equity to generate the net income. It is to determine the company using the debt to finance its assets. There are two methods to determine the risk of the debt which is debt ratio and debt-to-equity ratio. It is to determine a company’s management in keeping the inventory by calculating the inventory turnover and inventory period.
\nGross Profit Margin<\/strong>
\nGross profit margin = Gross Profit \/ Revenue x 100%
\nIt is the margin that you earned for every single product that you sell.
\nNet Profit Margin<\/strong>
\nNet profit margin = Net Profit \/ Revenue x 100%
\nIt is the margin that you earned after all the expenses incurred in the business as a whole.
\nDo take note that not all profit that you earned will go to you, as you need to reserve a portion of it for corporate tax, which is 24% in Malaysian context.<\/p>\n
\nLiquidity Ratios<\/strong><\/h5>\n
\nCurrent Ratio<\/strong>
\nCurrent Ratio = Current Assets \/ Current Liabilities
\nA company\u2019s current ratio provides an assessment of the company\u2019s ability to pay off its current liabilities using its current assets.
\nFor example ANC\u2019s cash is RM 40,000, trade receivable RM 60,000, stocks in hand RM 100,000 and its current liabilities is also standing at RM 200,000.
\n(RM 40,000+RM 60,000+RM 100,000)\/RM 200,000 = 1
\nThis indicate that the current assets now match with its current liabilities and it shouldn\u2019t have any trouble handling its financial obligations over the next course of 12 months.
\nQuick Ratio<\/strong>
\nQuick Ratio = Current Assets \u2013 Inventory \/ Current Liabilities
\nThe calculation of quick ratio excludes inventory balances. This is done in order to provide worst-case-scenario assessment. If we apply this equation to the same example for current ratio mentioned above:
\n(RM 200,000 – RM 100,000) \/ 200,000 = 0.5
\nThe 0.5 indicates that company needs to maintain at least higher sales in order to satisfy its liabilities.
\nAlthough the financial statement of a company can show how much net profit a company earns, it does not tell you the whole story in terms of how profitable a company really is. That\u2019s why these two ratios are very crucial.<\/p>\n
\nProfitability Ratios<\/strong><\/h5>\n
\nReturn on Assets\u00a0<\/strong>
\nROA = Net Income \/ Total Assets x 100%
\nA company\u2019s return on assets shows you the company\u2019s profitability in comparison to the company\u2019s size, by measuring its assets. This ratio tend to ask the business how efficiently a company using its assets to generates its profits?
\nFor example, your company has net income of RM 90,000 and total assets of RM 500,000.
\nRM 90,000\/RM 500,000 x 100% = 18%
\nThis shows that your company total assets able to generate 18% of the profits on that year.
\nReturn on Equity<\/strong>
\nROE = Net Income \/ Shareholder\u2019s Equity
\nIt compares to return on asset, return on equity is going on a entirely different playing field. It tend to as the business how efficient is the company using its investors\u2019 money to generate profits?
\nFor example, net income is RM 90,000 and total owner’s of equity is RM 300,000.
\nRM 90,000\/RM 300,000 = 0.3
\nThis shows that every dollar you invested able to generate RM 3.<\/p>\n
\nFinancial Leverage Ratios<\/strong><\/h5>\n
\nDebt Ratio<\/strong>
\nDebt Ratio = Liabilities \/ Assets
\nThis shows what portion of a company\u2019s asset is financed with debt.
\nFor example, RM 50,000 of liabilities and assets is RM 120,000
\nRM 50,000\/RM 120,000 = 0.4167 or 41.67%. This shows this company using 41.67% of debt to finance its assets.
\nDebt to Equity Ratio<\/strong>
\nDebt to Equity Ratio = Liabilities \/ Owner\u2019s Equity
\nThis shows the ratio of financing debt using capital from investors.
\nIt is obviously very risky and unhealthy a company to be very highly leveraged, meaning it is finance largely by debts. On a flip side, you may gained from using leverage. The more leverage a company is, the greater its return on equity will be for a given amount of net income.
\nIn other words, when the company\u2019s debt-to-equity ratio increases, the company\u2019s return on equity\/ Return on investment increased as well, even though income remain the same. That is also why banks are the best friends of businesses.
\nHowever, being highly leveraged, which is more debt and less invest from shareholders is obviously a risky way to run a business.<\/p>\n
\nStock Effectiveness<\/strong><\/h5>\n
\nInventory Turnover<\/strong>
\nInventory Turnover = cost of goods sold\/ average inventory [(beginning inventory + ending inventory)\/2]
\nThe calculation of inventory turnover shows how many times a company\u2019s inventory is sold and replaced over the course of a period.
\nInventory Period<\/strong>
\nInventory Period = 365\/Inventory Turnover
\nInventory period shows how long, on average, inventory is on hand before it is sold.
\nA higher inventory turnover and thus a lower inventory period shows the company inventory is selling quickly. This indicated that the management is doing a great job stocking products that are in high demand.<\/p>\n
\nCollection Status<\/strong><\/h5>\n