Archive about 'Interpretation of Financial Statements'

What Is Mark-Up And How Does It Impact Gross Margin Percentage

MARK-UP ON COST

 
Refers to profit expressed as a percentage of cost price.
 

FORMULA:

 
Mark-up = Gross profit /Cost of Goods Sold x 100
 

ILLUSTRATION:

 
Company sells two type of products A & B. Due to the high techelement in product A, the company is able to mark up higher on the product cost of A in relation to [...]

What is Capital Employed?

WHAT IS CAPITAL EMPLOYED?

 
Capital employed is basically the long term funds employed in a business.
 

Capital employed of a business is from the ordinary shareholders and from long term liabilities. Hence, it is the effective amount of money actually being used in a business, regardless of whether it is from the owners or creditor or banks.

The [...]

How Do We Identify Overtrading Companies or Undercapitalizated Companies?

WHEN DO YOU CONSIDER AN ENTITY BECOMES UNDERCAPITALIZE?

Opposite of overcapitalization. 

Undercapitalization would mean that the entity has not sufficient capital to provide for its own scale of operations.

Evidenced by high borrowings from trade creditors or bank borrowings

 

Undercapitalization can be a result of Overtrading:

      -can be due to over-ambitious expansion of business by increasing revenues but without  [...]

Overcapitalization and Its Tell-Tales Signs/Symptoms

WHEN DO YOU CONSIDER AN ENTITY BECOMES OVERCAPITALIZE?

Generally, an entity is said to be overcapitalized when it has fixed assets in excess of its actual needs

          and

A reasonable return is not being earned on the investments of these fixed assets

Sometimes, we might consider an entity overcapitalize when it has substantial amounts of [...]

Financial Ratio: Proprietary Ratio

The Proprietary Ratio represents the proportion of Proprietors’ Equity to Total Assets.
 
PROPRIETARY RATIO:

FORMULA

Shareholders’ Equity/Total Assets ( Current Assets+ Fixed Assets)

MEASURE WHAT

A test of Credit Strength. Is also a test of capitalization and a high or low ratio may indicate low or high earnings respectively per share.

SCORE/VALUE

A higher percentage denotes the stronger the financial position of [...]

Activity-Based Financial Ratio: Turnover Of Fixed Assets

TURNOVER OF FIXED ASSETS:

FORMULA

Net Sales / Fixed Assets

MEASURE WHAT

Measure the efficiency of the usage of fixed assets in generating sales

SCORE/VALUE

Varies.
The higher is the more effective

SALIENT POINTS TO NOTE

Comparing similar periods and similar industry statistics determines measures of efficiencies by which the assets in this case, fixed assets are employed in the business.

Using this turnover of [...]

Activity-Based Financial Ratio: Turnover of Inventory

TURNOVER OF INVENTORY:

FORMULA

Net Sales / Inventory

MEASURE WHAT

Measure the efficiency of the usage of inventory in generating sales

SCORE/VALUE

Varies.
The higher is the more effective

SALIENT POINTS TO NOTE

Comparing similar periods and similar industry statistics determines measures of efficiencies by which the assets in this inventory are employed in the business.

The faster the turnover of inventories, it means that [...]

Activity-Based Financial Ratio: Turnover of Accounts Receivable

TURNOVER OF ACCOUNTS RECEIVABLE :

FORMULA

Net Sales / Accounts Receivable

MEASURE WHAT

Measure the efficiency or  otherwise of the credit and collection policies of the enterprise

SCORE/VALUE

Varies.
The higher is the more effective

SALIENT POINTS TO NOTE

Comparing similar periods and similar industry statistics determines measures of efficiencies by which the assets in this case Accounts Receivables are employed in the [...]

Activity-Based Financial Ratio: Total Assets Turnover

Continued from my last article, we now look at the financial ratio for assessing the Activity of assets deployed by the company.

Essentially, the Activity ratios are able to measure the efficiency of managing or using of assets like:-

 total assets.

   accounts receivable,

 inventory,

  accounts payable, and

 
 
TOTAL ASSETS TURNOVER:

FORMULA

Net Sales / Total Assets ( or [...]

Market-Based Financial Ratio: Dividend Yield

DIVIDEND YIELD:

FORMULA

Dividends per share / Market price per share

MEASURE WHAT

Share rate of dividend to shareholders based on market price

SCORE/VALUE

Higher ratio is better. Depends on performance of the company itself & objectives of Management as studies show higher yields can increase share prices

SALIENT POINTS TO NOTE

It is the cash rate of return by shareholders through dividend