kindly help me to understand this:
The manufacturing costs of a company include raw material,
direct labor, and overheads. Overheads can be the maintenance of machinery, power and fuel, electricity, marker papers, depreciation, rent and utilities.
The indirect costs of the company include the expenses relating to marketing, accounting and administration.
For trend analysis, a common approach is to establish the oldest year as the base year and compute future years as a percentage of the base year (Heisinger, K., & Hoyle, J. B., n.d.).
In this situation, as the company is in existence from the last four years, I would compare the data for the last two years, then the previous year can be considered as the base year and the recent year as the current year.
The three most important line items in a balance sheet are cash, total liabilities and retained earnings.
Cash is important as it analyzes the liquidity position of a company and checks the amount of liquid cash available with the company.
Total liabilities are important as it affects both the short term and long-term position of a company. Thus, it is very important to check the amount of liability raised or reduced from one period to the other.
Retained earnings provide information about the profitability of a company for a specific time period and it is very important for the investors to know about the correct profitability position of a company.
The three most important line items in an income statement are sales, gross profit and net profit.
Sales are important as it analyzes whether a company would be able to increase its sales from the previous year or not. Moreover, the profitability of the company is completely based on the sales of the company.
The gross profit helps to know the amount of change a company has made in the direct expenses and due to which the profits of the company have increased or decreased.
Finally, the net profit helps in analyzing the overall profitability of a company.
It is important to observe both the increase and decrease of the values in the linear trends. If the value of the sale is decreasing, then it is important to analyze if the cost is also decreasing or not and finally, the analysis of gross profit can be done. This will help management to motivate the sales department and to discuss a new technique with which the sales of the company can be increased.
Here, the sale is taken as an example and the same can be done for any of the line items.
The common size is a vertical technique of the trend analysis. In this, a specific item from a year is taken and then all the other items are analyzed based on that item.
In the income statement, the most important line item is sales. Thus, all the other items are analyzed using the sale as a base item. For computing the same, the below-mentioned formula can be applied.
Percentage change = Item to be compared / Sale *100
After completing the calculations relating to the trend analysis, it is important to write a brief of the changes that are observed in each of the line items.
For example: If cash has been increased or the overall liquid assets have been increased, then it is a positive sign that a firm is improving its liquidity position. Further, the analysis of liabilities can be done.
In conclusion, by analyzing the historical behavior of a manufacturing shop over the last four years, evidence can be gathered to issue an opinion and to predict future movements of the sales price (what is trend analysis, n.d.).
1.please how can i assess the financial statements of this manufacturing company using ratio tools after performing trend analysis?
2.please help me to Select at least one profitability, liquidity, solvency, and market valuation ratio and evaluate the results.
3.please based on the findings,
a)please what do the metrics tell us about the company's performance?
b)kindly help me to support the answer by explaining the results from the assessment.
c)If you were considering investing in the company, kindly explain what other questions to ask to gain further insight into the performance?
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