Group of financial analysis indicators

Last updated: 09.11.2016

The series describes basic groups of financial analysis indicators. 

In addition to this series, you can use this Overview of financial analysis formulas.

 



Profitability indicators

Profitability is defined as the ability to achieve profit by using various resources.

Profitability indicators form one group of financial analysis, which are used to evaluate profitability and efficiency of the company management, i.e. the company's ability to produce maximum output (i.e. margin or profit), ideally with minimal inputs.

 

Group of profitability indicators includes the following indicators:



Liquidity indicators

Liquidity is the entity´s ability to convert its assets into cash for the purpose to settle its obligations, ideally with the lowest possible transaction costs. (14)

 

Indicators of liquidity

Liquidity indicators show the extent to which the current assets of the company in various forms cover its short-term obligations. Thus, the number of times the entity is able to settle its current liabilities from the conversion of the current assets to cash. Therefore, it evaluates short-term financial position of the company.

 

This category includes the following basic indicators:

 

Their general interpretation:

  • lower values ​​indicate lower ability to pay short-term obligations
  • too high values may indicate inefficiencies - it is recommended to evaluate them together with turnover ratios
  • ideal values ​​shall thus be neither low nor high
  • recommended ideal values are stated within the description of each indicator individually

Comparison:

  • with the recommended values
  • however, some variations are possible by industry, type of company etc. - so it is very important to compare the indicators in time-series; it the company does not achieve the recommended values, but have done well without any problems, it can be then expected that it will continue to be successful with the same values in the future
  • appropriate is the comparison is with the industry average or with similar companies in the industry

 

Possible reasons for higher liquidity (the reasons for the lower liquidity can be applied conversely):

  • high levels of stocks (only for current liquidity)
    • this can be related to the branch (e.g. commercial companies tend to have high stock values)
    • high-quantity purchase of stocks due to favorable terms (discount), expected price increases or shortages
    • seasonal fluctuation in demand
    • stocks are overvalued - e.g. no legitimate provisions for inventories were made
    • the company holds excessive inventory. The adequacy of the level of stocks can be assessed by using indicators of activity (Inventory turnover ratio or Inventory period).
  • high receivable balances (only for current and quick liquidity ratios)
    • high receivable recorded at the end of the year, which was not paid by the end of the year
    • uncollectable debt increased
    • higher maturity provided to customers, e.g. within acquisition or retention process
    • receivables are overvalued, for example, e.g. no legitimate provisions to receivables were made
  • low payable balances, e.g. due to effective supplier management
  • economic growth, during which is the liquidity lower, because liabilities are growing faster than current assets (14)

 

Other indicators that may also be included among the indicators of liquidity:


Indicators of indebtedness and financial structure

The company may be financed by equity (share capital, share premium, retained earnings) and debts (loans, outstanding liabilities etc.).

Indebtedness is the term used to evaluate the extent to which is the entity financed by debts (or generally liabilities).

 

Indicators of indebtedness and financial structure monitor how the company is financed and what is its ability to cover long-term liabilities.

Group of indebtedness and financial structure indicators include:



Indicators of activity

Activity indicators evaluate the efficiency of the company in the use of its assets. They evaluate in particular how long the property holds its form, but it converts into sales or cash and turnover rate.

 

If the company holds:

  • too much assets → inefficiency; in addition, the assets must be financed somehow, so the company pays "unnecessary" interest
  • too little assets →  the company may not be able to meet the customer´s demands within the agreed deadlines or respond to new market opportunities

the company should find a reasonable compromise

 

Disadvantages of activity ratios:

  • valuation of assets and prices at which assets were acquired has a great influence (various purchase prices)
  • it compares various assets from balance sheet, which is a fixed variable and the indicators of profit or loss (mostly sales), which is the sum of transactions over the entire period of time (usually a year). For this reason, balance sheet entries are often calculated as the arithmetic average of the beginning and end of the period and exclude the items that could not to have an impact on the income statement.

 

The indicators are divided into two mutually inverse groups:

  • turnover period, i.e. how long the property holds its form, before it is converted into sales or cash. These indicators should be as low as possible.

calculation: selected asset or liability / revenue or costs * number of days in the year (360/365)

 

  • turnover ratios, i.e. number of cycles during a period of time (usually 365 or 360 days). The higher are these indicators, the better.

calculation: sales and costs / selected asset or liability

calculation from turnover period indicators: 365 / given indicator of turnover period

 

Interpretation: important is trend.

 

Indicators of activity are:


Indicators of market value or capital market

Investors give their money into undertakings mainly for the purpose of obtaining:

  • dividends
  • capital gains from sale of business or its shares - if the market value of shares grows, the potential proceeds from their sale increase as well

 

Market value indicators often use data about market value of shares and the amount of dividends in its calculations and as such bring into the financial analysis the point of view of investors who evaluate the company not only based on the current development, but also by expected future situation.

 

Group of indicators of market value and capital market include the following indicators:



Group of indicators for broader company analysis

This group may include:


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