2. Evaluation of Financial Performances.ppt - 2 Users of Financial Statements(Evaluation of Financial performance 1 2 3 4 Shareholders/owners –

2. Evaluation of Financial Performances.ppt - 2 Users of...

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Evaluation of Financial Performance 1 2. Users of Financial Statements (Evaluation of Financial performance) 1. Shareholders/owners – interested in the profits earned, financial health performance and potential growth of the company. 2. Managers – need financial statements to evaluate the firm’s performance, for planning, organizing and controlling the firm’s resources. 3. Creditors/lenders – interested in the firm’s profitability and in the firm’s ability to repay loans. 4. Current and future employees – to determine the monetary benefits that they can obtain from the firm.
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Evaluation of Financial Performance 2 Users of Financial Statements 5. Prospective investors – to assess profitability, stability, growth potential and financial health. 6. Customers – to ensure that the company can deliver not only the goods ordered but also the legal obligations associated with guarantees, warranties or deferred benefits 7. Government – to determine the firm’s declaration and payment of taxes, fix price of essential goods and utilities and make expansion plans for the economy.
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Evaluation of Financial Performance 3 What is Financial Analysis? 1. Assessment of a firm’s past, present and anticipated future performance. 2. Analysis is based on the firm’s financial statements. 3. Focus on historical performance to estimate future performance. 4. Allows comparison of company’s performance over time as well as its performance relative to its competitors.
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Evaluation of Financial Performance 4 Objectives of financial analysis To identify the firm’s strengths so that the company can capitalize these strengths and weaknesses so that the firm can take remedial and corrective actions.
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Evaluation of Financial Performance 5 FINANCIAL RATIOS 1. Useful indicators of a firm’s performance and financial situation. 2. Mathematical aids for evaluation and comparison of financial performance. 3. Used to analyze trends and to compare the firm’s financials to those of other firms. 4. Tell use whether the business : 1. Is profitable 2. Has enough money to pay its bills 3. Could be paying its employees higher wages 4. Is paying its share of tax 5. Is using its assets efficiently 6. Has a gearing problem
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Evaluation of Financial Performance 6 Objectives of Ratio Analysis 1. To standardize financial information for comparison purposes 2. To evaluate the firm’s current operation 3. To compare present performance with past performance 4. To compare the firm’s performance with other firms or industry standards. 5. To assess the efficiency of operations 6. To assess the risk of operations.
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Evaluation of Financial Performance 7 Types of Comparisons 1. Internal Comparison – analysis based on comparisons of similar ratios for the same firm at different periods. It is also known as time series analysis . For example, comparing this year’s profitability with last year’s profitability. The objective is to analyze the financial condition and performance of the firm over time.
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