Construction Financial Management

Interpretation Company Accounts – CW 1

Name:
ID:
Leigh McLoughlin
BSc (Hons) in Construction Project Management
Submission date: 19th April 2016
Date submitted:

TABLE OF CONTENTS
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Table of Contents
1.0 Part A – Analysis of ABC’s financial accounts..........................................................................1
1.1 The profitability ratio.............................................................................................................1
1.1.1 Gross profit Margin........................................................................................................1
1.1.2 Net profit Margin............................................................................................................2
1.1.3 Return on the Capital Employed.....................................................................................2
1.1.4 Analysis of the profitability ratios..................................................................................3
1.2 The liquidity ratio..................................................................................................................3
1.2.1 Current Ratio..................................................................................................................3
1.2.1 Analysis of liquidity ratios for ABC Company...............................................................4
1.3 The efficiency ratio................................................................................................................4
1.3.1 Cash Turnover.................................................................................................................4
1.3.2 Debtors Turnover............................................................................................................5
1.3.3 Analysis of Efficiency Ratios for ABC...........................................................................6
1.4 The investment ratio..............................................................................................................6
1.4.1 Earnings per share:.........................................................................................................7
1.4.2 Price to earnings Ratio....................................................................................................7
1.4.3 Analysis of the investment ratio.....................................................................................8
2.0 Part B – Importance of financial planning.................................................................................9
2.1 Financial plan.........................................................................................................................9
2.2 Financial control....................................................................................................................9
2.3 Importance of financial planning...........................................................................................9
2.4 Importance of financial control in Irish construction industry..............................................9
2.4.1 Financial control at strategic level................................................................................10
2.5 Implications of financial control..........................................................................................12

TABLE OF CONTENTS
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2.5.1 Budgeting......................................................................................................................12
2.5.2 Determining the cost.....................................................................................................12
2.6 Time frame...........................................................................................................................13
2.7 Financial control..................................................................................................................13
2.7.1 Income statement..........................................................................................................13
2.7.2 Balance sheet................................................................................................................14
2.7.3 Financial audit..............................................................................................................15
2.8 Conclusion...........................................................................................................................16
References......................................................................................................................................17

PART A – ANALYSIS OF ABC’S FINANCIAL ACCOUNTS
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1.0 Part A – Analysis of ABC’s financial accounts
This part of the project is related with the ratio analysis of the company. Ratio analysis of a
company is the management tool which is used to understand the financial health of the
company. Management use financial ratios to find the weaknesses and the strengths of the
company. There are different types of ratios which companies use to find the financial
performance of the company. Most common financial ratios are profitability, liquidity, efficiency
and investment. While the second part of the paper is based on importance of financial planning
and control for a medium sized construction company which is engaged in building in the Irish
construction industry.

1.1 The profitability ratio
Profitability ratios are used to measure the financial performance of the company. It tells that
how much profits company is making during a specific time period. The profitability ratios of the
company according to the data provided for the year 2014-2015 is as follows:

1.1.1 Gross profit Margin
For the year 2014:
= Gross profit x 100
Sales
= 48,491 x 100
100,690
= 48.16%
For the year 2015:
= Gross profit x 100
Sales
= 47,906 x 100
104,635
= 45.78 %
Percentage change between the year 2014 and 2015:
= 2015-2014 x 100
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PART A – ANALYSIS OF ABC’S FINANCIAL ACCOUNTS
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2014
= 45.78 % - 48.16 % x 100
48.16
= -4.94 %

1.1.2 Net profit Margin
For the year 2014:
= Net Profit x 100
Turnover
= 8787 x 100
100,690
= 8.73 %
For the year 2015:
= Net Profit x 100
Turnover 0000
= 6,736 x 100
104,635 0000
= 6.44%
Percentage change between the year 2014 and 2015
= 2015-2014 x 100
2014
= 6.44 % - 8.73% x 100
8.73%
= -26.23 %

1.1.3 Return on the Capital Employed
Profit before tax x 100
Capital employed
Capital employed = Total Assets- Current Liabilities
For the year 2014:
= 12,327x 100
52,622 000
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PART A – ANALYSIS OF ABC’S FINANCIAL ACCOUNTS
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= 23.42%
For the year 2015:
= 9,438x 100
55,772 000
= 16.92%
Percentage change between the year 2014 and 2015
= 2015-2014 x 100
2014
= 16.92 % - 23.42 % x 100
23.42 %
= -27.22 %

1.1.4 Analysis of the profitability ratios
According to the financial data provided for the years, 2014 and 2015, the gross profit ratio
(which means the financial status or the profit status of the company at a particular period of
time, this might now be the end of the year) in the year 2015 has decreased by -4.94 % which
means the company could not create a balance between the profit and loss by the end of the year
2015 and is facing a loss.
In the net profit margin, the net profit ratio (which means the status of the company’s finance at
the end of a financial year) the data suggests that the net income of 2015 has decreased by 25.72
% and is facing a loss. This means the expenses of the company were more than the profit the
company has earned. The provided financial data showed that the return on the capital data
which means the investment made by the shareholders has increased by -27.22 %, which shows
that the company is earning a profit.

1.2 The liquidity ratio
Liquidity ratios of the company show that how much assets a company has to pay its financial
liabilities. The liquidity ratios of the company according to the data provided for the year 20142015 is as follows:

1.2.1 Current Ratio
= Current Assets
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PART A – ANALYSIS OF ABC’S FINANCIAL ACCOUNTS
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Current Liabilities
For the year 2014:
= 39,899
22,558
=1.77
For the year 2015:
= 39,152
21,702
=1.8
Percentage change between the year 2014 and 2015
= 2015- 2014 x 100
2014
= 1.8- 1.77 x 100
1.77 0000
= 1.7 %

1.2.1 Analysis of liquidity ratios for ABC Company
The liquidity ratio shows that the year 2015 shows an increase by 1.7 %, this means that the
liabilities of the company can be covered easily by the assets that are owned by them. Moreover,
as the current asset of the company has increased in 2015, this shows that company performance
has improved.

1.3 The efficiency ratio
Efficiency ratios are used to measure that how efficiently company is using its liabilities and
assets internally. The efficiency ratios of the company according to the data provided for the year
2014-2015 is as follows:

1.3.1 Cash Turnover
= Net Sales / Turnover
Cash
For the year 2014:
=100,690
10,079
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PART A – ANALYSIS OF ABC’S FINANCIAL ACCOUNTS
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= 9.99
For the year 2015:
= 104,635
7,439
= 14.06
Percentage change between the year 2014 and 2015
= 2015- 2014 x 100
2014
= 14.06- 9.99 x 100
9.99000
= 40.74 %
Total Asset Turnover
= Turnover
Total Assets 000
For the year 2014:
= 100,690
75,180
= 1.34
For the year 2015:
= 104,635
77,474
= 1.35
Percentage change between the year 2014 and 2015
= 2015- 2014 x 100
2014
= 1.35- 1.34 x 100
1.34
= 0.75 %

1.3.2 Debtors Turnover
= Sales
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PART A – ANALYSIS OF ABC’S FINANCIAL ACCOUNTS
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Average Debtor
For the year 2014:
= 100,690
(11713+13632)/2
100690
12673
=7.94
For the year 2015:
= 104,635
(13632+15610)/2
= 104,635
14621
=7.16
Percentage change between the year 2014 and 2015
= 2015- 2014 x 100
2014
= 7.94- 7.16 x 100
7.16
= 10.9 %

1.3.3 Analysis of Efficiency Ratios for ABC
Efficiency ratio is used to calculate that how well a company uses its assets and liabilities
internally (Argenti, 1976). The data provided shows that the cash turnover of the year 2015 has
increased by 40.74 %. This means that the company is going through its cash cycle rapidly as
compared to previous year. Moreover, the debtor turnover shows that company is receiving their
old accounts receivable.

1.4 The investment ratio
Investment ratios are used to measure the market value or the market position of the company.
The investment ratios of the company according to the data provided for the year 2014-2015 is as
follows:
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PART A – ANALYSIS OF ABC’S FINANCIAL ACCOUNTS
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1.4.1 Earnings per share:
For the year 2014:
= 46.67
For the year 2015:
= 35.91
Percentage change between the year 2014 and 2015
= 2015- 2014 x 100
2014
= 35.91- 46.67 x 100
46.67
= - 23.06 %

1.4.2 Price to earnings Ratio
= Market Price per Share
Earning per Shares
For the year 2014:
= 370
46.67
= 7.93
For the year 2015:
= 415
35.91
= 11.56
Percentage change between the year 2014 and 2015
= 2015- 2014 x 100
2014
= 11.56- 7.93 x 100
7.93
= 45.73 %

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PART A – ANALYSIS OF ABC’S FINANCIAL ACCOUNTS
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1.4.3 Analysis of the investment ratio
The provided data proves that the earning per share has decreased by -23.06%, this result shows
that the shareholders are receiving less of the dividend against their shares. However, the price to
earnings ratio also has increased resulting in the profit for the company by 45.73 %. This means
that market value of the company has increased.

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PART B – IMPORTANCE OF FINANCIAL PLANNING
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2.0 Part B – Importance of financial planning
2.1 Financial plan
Financial planning refers to the strategies and policies which are implemented to achieve the
financial growth of a company in the prescribed time as mentioned by Sealey (1978). Simply, , it
can be described as the process, through which the capital of the company and the capital
requirements of the company are predetermined; in this process financial policies are designed in
such a way so that they can utilize the company’s financial resources in the best possible way, i.e.
balancing the assets and liabilities at the end ("Financial Disclosure Statement Omitted.", 1996).

2.2 Financial control
According to Argenti (1976) financial control means such policies which are required to ensure
effective implementation of financial planning. Financial control involves managing the income
statement, cash flows, and budget.

2.3 Importance of financial planning
Designing an effective financial plan allows an organisation to decide the future policies through
observing the company’s state in future as believed by Mason (1975). Deciding future policies
assists the company in analysing the risks involved so that they can take better more effective
financial decisions while completely dependent upon the implemented financial plan.
An Irish construction company tends to design its financial plan, this study will look into the
steps and concepts which needs to be considered when an Irish construction company sought to
design its financial plan ("Cases in financial management" 1993).

2.4 Importance of financial control in Irish construction industry
Financial controls are termed as the rules which tends to determine the ways to handle financial
planning of the organisation internally. In Irish construction industry, these rules ensure that the
organisation’s accounting and financial staff is acting according to the set guidelines and
misusing funds of the organisation is being prevented. It suggests that in an Irish construction
company funds are allocated to all the departments appropriately and simultaneously e.g. labor,
suppliers, engineers, contractors etc. The finance control department have the responsibility to
ensure that only the desired amount of assets are used in expenditure of the company whenever
required (Argenti, 1976).
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PART B – IMPORTANCE OF FINANCIAL PLANNING
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If management of the company has deployed effective control and rules, then they can ensure
that the company’s assets are not being wasted, for e.g. if the company have got a tender to
provide cements and bricks to the builder of a particular building then it is the responsibility of
finance control department to keep check on the quantity of cement and bricks that are required
to complete the project requirements and that the quantity should not exceed or must not be less
than the prescribed limit. Once finance control department have approved on the quantity, the
need to get the expenditure approved by the accounts department while ensuring that exact
quantity of materials along with their costs is registered with the accounts department (Lev,
1973).
Financial control of the Irish construction company would also allow them to effectively evaluate
their operations in a systematic way – after developing the financial statement difference in the
amounts is calculated with reference to the amount set in the financial plan. This check and
balance will allow the management of the construction company to keep a better eye on how
well the responsibilities of the company are fulfilled and whether the rules are followed
appropriately or not. This will also provide the management, or specifically the finance
department, the ability to have a better insight in the ongoing finance operations which could
eventually help the management to take better decisions regarding their future prospects, i.e. the
future projects the company might take, by helping the company to take better decisions
according to how well the financial plan is executed and controlled.

2.4.1 Financial control at strategic level
Bodie (1990) argued that a construction is required to carry out on examination on certain factors
before taking any contract, it would involve the calculation of time, amount which are
necessarily required to complete the project. Efficient companies also carry out a detailed risk
analysis so that contingency plans can be developed and acted upon whenever required, this step
is mandatory to ensure as construction industry is highly vulnerable to risks which can range
from natural disasters to legal problems. Bodie mentioned that companies will also observe their
current assets and liabilities to avoid any future implications in the future.
As previously mentioned, the construction company is highly exposed to risks and the main
responsibility of finance department at the strategic level is to prevent such risks from happening
such as shortage in the inventory or absence of workforce (Bodie, 1990). The best way
implement this strategy is to keep a better track of all the previous projects and any kind of
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PART B – IMPORTANCE OF FINANCIAL PLANNING
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deviance in the budget as well and strategy as mentioned in the financial plan, and then taking
proper measures to keep everything on track.
A construction company1 can’t achieve its objectives without implementing proper measures and
control in the finance department. The financial controls will assure the effective usage of all the
resources and as well as the influx and expenditure required by these resources (Lev, 1973).
The construction company can keep a better financial control by implementing the following
measures (Lev, 1973).
 The construction company can keep a better financial control through maintaining proper
financial discipline in the company i.e. to examine whether the inflow and out flow of the
company’s resources are justified according to the financial plan.
 Another way to keep the financial control is through attaining the alignment and
coordination of all the departments of the construction company with each other; it will
allow the resources to be utilized effectively.
 Through maintaining an effective financial control, the company can ensure resource
wastage is minimum, therefore, the revenues and economic reputation of the company
can increase significantly whereas it will leave the company with enough resources that
they can utilize in other projects.
 Financial control will also allow the company to keep track of the debt and credit
collection periods which will ensure enough liquidity, therefore, increasing the worth of
the company, both economically and socially.
 The comparison is to be achieved between the financial planning and the company’s
ongoing status to maintain a better financial control. It would, again, help the company in
increasing the revenues.
 Appropriate steps should be taken to remove the difference in the plan and execution if
required.

2.5 Implications of financial control
2.5.1 Budgeting
2.5.1.1 Budget approach
1 Wherever “Construction Company” is written it is referring to Irish Construction Company, the
term “Irish” is not written to avoid repetition in the report.
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Before taking any project, the company should decide the approach which needs to be followed
for controlling the budget, however, it is important to note that the decision of a particular budget
approach depends on certain factors that are not discussed in the study because of its scope and
limitations. The approaches which can be followed are listed as follows (Cases in financial
management, 1993):
 Top-down approach: Expendable capital is firstly decided and the cost per every project
is decided according to the previously calculated capital.
 Bottom-up approach: The cost per every project is determined at first and accumulation
of cost takes place at the end.

2.5.2 Determining the cost
2.5.2.1 Direct cost and indirect cost
After determining the budget approach the second step in budgeting is to align the direct and indirect expenditure, these expenditures would include the labor, equipment and material costs
required by the company for construction (Sealey, 1978).
2.5.2.2 Overheads
Apart from direct and indirect expenses mentioned above some overhead expenses must also be
taken into consideration, neglecting such expenses can create difficulties in the later run of the
project; these costs include the legal fees for the advisors such as architects or accountants, food
supply of labor etc. (Velez-Pareja, n.d.).
2.5.2.3 Risks
The risk factor must also be kept in mind while preparing the budget for the financial plan. It is a
mandatory step which needs to take into account such risks which can’t be predicted such as
natural disasters, death of labor etc. contingency plans needs to be developed against each
identified risk otherwise the project will not be completed as per the company’s developed
schedule and expenditures of the company might increase to complete the project (Mason, 1975)
and (Cases in financial management, 1993).

2.6 Time frame
To determine the expenditures required to complete a project, it is necessary that the company
considers the “time” factor. If the time for the ongoing project is known, it would be easier for
the company to assign the budget to new projects and to understand the amount of expenditure
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required to spend on the individual project in a given period of time (Financial Disclosure
Statement Omitted, 1996). Argenti (1970) that a construction company can only acquire financial
control once the management has defined the financial plan which includes all the factors
discussed above and that which will be discussed later in this study.

2.7 Financial control
Financial control means to implement and control the planning which has been completed by the
top management. This is usually achieved at the year’s end and after evaluating the financial
planning along with the company’s present situation.
The main purpose of the financial control, here, is to ensure that the planned expenditures are in
line with the spent expenditures and right amount of capital is invested so to earn right amount of
profits (Velez-Pareja, n.d.).
Such financial control would be possible through analysing the ways through which a company
controls its financial statements (Lev, 1973). This is because of the fact that financial statements
portrays an accurate position of what the company’s present situation is and what can be
expected from the company in future, following elements helps the company in analysing its
financial position (Bodie, 1990)
 Income statement
 Balance sheet
 Financial audit

2.7.1 Income statement
At the end of the financial year or, in some organisations, a month, the income statement
provides the construction company a detailed view of the losses and profits the company which
they have faced in the completed projects. The income statement also tends to provide details on
how much expenditure has been spent on a project along with the revenues which they have
generated through the same project. This help the company to examine whether the Return on
Investment (ROI) was higher or not because if it’s not the company have to reengineer the
finance department (Bodie, 1990). Moreover, the income statement would define the total value
of the projects undertaken by company i.e. how much has been spent on the material bought
from the market and how much the company still has in the inventory for future projects (Lev,
1973).
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Furthermore, it was also help the company analyse how many ongoing projects have been ended
and how many are still in process and whether more machinery or labor is required to complete
those projects (Sealey, 1978). This would define how much further expenses the company still
has to spend for its projects, e.g. the capital to be spent on the contracts, marketing of the
company, depreciation of the machinery the company owns, insurance of the owned products,
wages of the labor they have hired and other stakeholders (construction project involves a
significant amount of stakeholders) e.g. the contractor, architect, technical staff etc. (Bodie,
1990).
Most of the companies deduct all the previously calculated expenses from the starting budget of
a particular project in a financial year or month (Mason, 1975). If the company’s present
financial statement shows decreased amount of profits than the expenditures spent, the
construction company would then have to control the excess cost through adopting some
measures against it such as minimizing the costs of labor, food, and determining where the
excess amount is spent.
However, if the profits are significantly higher than the expenditures at the present time the
company must encourage and motivate the labor through a proper rewarding system, but the case
being discussed in this study is of a middle sized company they can, after rewarding their
employees with a less margin, save the earned profits in expanding its business can be used for
future business prospects (Velez-Pareja, n.d.). Income statement is used in financial control
because it illustrates the current financial performance of the company and also predicts the
future profitability as well as the financial performance. Companies can use income statement to
determine the areas where implementation of financial control is necessary in order to reduce the
expenses of the company, therefore increasing the profits.

2.7.2 Balance sheet
The balance sheet is another type of financial statement which defines the company’s situation at
any particular time. This statement defines the relationship between assets and liabilities whereas
assets the elements that are contained within the ownership of the company and liabilities are the
elements company owes to different stakeholder, that can be governments (in the form of taxes)
and banks (loans) (Bodie, 1990). Referring to Irish Construction Company its assets can be staff
members, company owned machinery, capital of the company and etc. Liabilities can be the loan
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PART B – IMPORTANCE OF FINANCIAL PLANNING
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to banks, rent of hired machinery, due (payable) bills and taxes to the government (Financial
Disclosure Statement Omitted, 1996).
The balance sheet, if properly prepared, would contain the complete status of all the assets and
amounts of the construction projects being in operation (Cases in financial management, 1993).
Non-current assets of a company includes the land on which the company is built, machinery the
company owns and different investments the company has made on other projects not related to
construction (such as FOREX). Currents assets includes the capital at hand, ongoing projects and
so on. The balance sheet compares all these assets against the liabilities the construction
company possesses. The liabilities includes, but are not limited to, wages of the employees and
freelancers/advisors the company has to pay, loan if the company has taken some, payments to
be made in the context of the construction projects, bills and taxes. (Lev, 1973).With the
assistance of balance sheet management can plan, evaluate, and control ongoing operations of a
company. Management uses such statements for decision making process and for the expansion
of the company, which ultimately contributes to the financial control.

2.7.3 Financial audit
The financial audit is generally the verification of whether the financial statements provided by
the accounting department are error-free or do they have some flaws (Argenti, 1976). This will
be achieved with the help of an experiences and professional auditor which will analyze the
company’s financial statement and then comparing these statements against the present assets
with liabilities and profits with losses. Financial audit is conducted according to the international
accounting standards whereas auditors are required to audit on the cash basis or on accrual basis
whichever is used by the company. Auditors provide their opinion on financial matters and
determine provide suggestions on improving their current financial status. This serves as the
means of implementing financial control and planning in the construction company. Auditors
usually provides four type of opinions to the company, as set by international accounting
standards, namely, unqualified opinion, qualified opinion, adverse opinion and the disclaimer of
opinion. These opinions tells the company whether the financial statements are true or not and
whether they are prepared according to the International Accounting Standards. The main
purpose of financial audit is to provide opinion on the independent objects that have the tendency
to increase the value/worth of the company and decreases the investor’s risk.
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2.8 Conclusion
The study found that in order to gain increased amount of profits (less expenditures), and to
excel in the construction industry, the company’s management would have to maintain strict rule
regarding the spending of expenditures. Vigorous steps needs to be taken by the company to
acquire more projects such as completing them on time, maintaining the costs effectively so that
the profit is higher than the expenditure. Strict eye would have to be kept to ensure that no extra
money is being spilled because even a minute expense can lead to long-term loss of the company
and sometimes even to bankruptcy.

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REFERENCES
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References
Argenti, J. (1976). Financial aspects of corporate planning. Long Range Planning, 9(2), 101.
Bodie, Z. (1990). Pension Funds and Financial Innovation. Financial Management, 19(3), 11.
Cases in financial management. (1993). Long Range Planning, 26(2), 135.
Lev, B. (1973). Decomposition Measures for Financial Analysis. Financial Management, 2(1),
56.
Financial Disclosure Statement Omitted. (1996). Archives of Neurology, 53(10), 964-964.
Mason, S. (1975). Strategic planning for financial institutions. Long Range Planning, 8(5), 93.
Sealey, C. (1978). Financial Planning with Multiple Objectives. Financial Management, 7(4), 17.
Velez-Pareja, I. Financial Analysis and Control - Financial Ratio Analysis (Slides). SSRN
Electronic Journal.

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