Financial Analysis Singapore
Instead of just using the balances presented in the financial statements or annual reports, users of financial statements compute a number of financial ratios to aid their understanding of the statement. Investors and business owners alike use financial ratios to interpret the health of the company.
Financial ratios which are obtained from the financial statements provide further insight into the health of a company, especially when compared against the competitors or the industry standard. Financial ratios enable financial statements of different companies to be comparable.
Some of these ratios and the meaning behind the ratios are explained here:
- Leverage ratio (for example, debt/equity)
- This ratio represents the degree of leverage the business has.
- A high ratio indicates the company is highly leveraged and could be a risky investment for investors. Whereas, too low a ratio may indicate the company is not using debt effectively for its businesses.
- Interest coverage ratio (earnings before interest and tax interest expenses)
- This ratio represents the capacity of the business in meeting its interest obligations
- It is a measure of financial stability
- Liquidity ratio (for example, current assets/current liabilities)
- This ratio indicates a companys ability to meet its debts when due.
- A low ratio could indicate poor cash management.
- PE ratios (share price per share/earnings per share)
- This ratio indicates the market valuation of the businesses
- A high PE ratio means investors are expecting high earnings growth for the business. Hence, they are willing to pay more for each dollar of earnings.
- Return on Assets ratio or more commonly known as ROA (net income/average total assets)
- This ratio measures the amount the company is earning from its total assets.
- Higher ROA indicates better asset performance or utilization. However, to determine whether an ROA is good enough, it must be compared against other businesses within the same industry.
- Dividend per share ratio (dividend declared/amount of shares)
- This ratio shows the amount of dividends that investors received during a particular period for each share held. The dividends could be split into two portions, an interim dividend which is declared half way through the financial year and a final dividend at the end of the financial year.
- Dividend yield ratio (dividend declared per share/share price per share)
- This ratio gives investor a better sense of return on their investment as compared to dividend per share ratio. Investors would have to then assess whether this return is acceptable for the risk of investing in the business.
- Debtors Day ratio (average trade debtors/sales * 365 days)
- This ratio measures the debtor collection period.
- A high ratio means debtors take longer to pay and could indicate possibility of debtors defaulting. As cash is the lifeline of any businesses, this ratio much be kept as low as possible.
These are just small samples of the various ratios that business owners or investors are using to aid their decision in managing and investing in businesses. Different ratios will be more important for different industry segment. For example, liquidity ratio will be more important for a business with low profit margin but high volume. That is not to say liquidity ratio is not important for a business with high profit margin but low volume. It is still important but the former business may be monitoring their liquidity ratio daily or weekly and the latter may be monitoring it monthly.
Service providers selected by SingaporeAccounting.com are able to assist you in computing the ratios and providing the information to your business regularly. You will be able to know at a glance how your business is doing and how it performed compared to previous period. You will know whether your business is solvent and how your business is performing in key areas. You will be able to determine the business segment which produces the best return for your assets.