Sevilla, Renz Marie A.

BSBA FM 2-C
X100
ASSIGNMENT # 2 X100
As I`ve watch the video, I learned some knowledge that can contribute in learnings that
is related in my course subject that discussed about on how to compute ratio analysis, where it
came from, importance of ratio analysis and many more. Let me discussed what I`ve been
learned.

Based on the video presented, ratio analysis involves the comparison of financial data
to gain insights into business performance. X365

Therefore, ratio analysis is a tool or technique that used by the business firms to evaluate
the overall financial condition of their business. It compares the financial data in order to know if
their business is more profitable, able to stay solvent (is company are able to pay its obligation &
able to continue in business?) , is their assets are effectively and identifying returns if being
earned in investment. Furthermore, information that would be the basis to ratio analysis came
from 2 financial statements; income statement to know if they gain profit or loss and balance
sheet that also known as Statement of Financial Position that includes assets, liabilities and
owner`s equity.

There are four (4) stages of ratio analysis ; First gather data, gathering financial data that
the basis are came from income statement and balance statement, calculate ratios using
corresponding ratio formula, interpret the results on what will be the result and if there`s
unnecessary result it should be take some actions.

Ratio analysis can be classified as into three (3) main groups; profitability ratio that
measures and ability to generate profit such as gross profit margin, operating profit margin and
return on capital employed. It is also assess the returns earned by a business from its trading
activities by taking risks and making investments, thus it is the source of their financial needs,
measurement of success if they are gaining profit and perform well and motivating factor &
incentive. Profitability ratio`s users are shareholders, government, competitors, and employees.
This ratio can compute using the formula which is total sales less total costs and the answer will
be either gain profit or loss. There are two (2) ways to measure profits, absolute and relative.
Absolute term measures the overall value of profits earned made in the specific year without
making other changes while relative term measures as a proportion of sales achieved or
investment made, in other words it is the comparison of two sales of product amongst them.

PROFITABILITY RATIOS:
GROSS PROFIT MARGIN OPERATING PROFIT MARGIN
SALES REVENUE X100 SALES REVENUE X100

NET PROFIT MARGIN OPERATING PROFIT

Sevilla, Renz Marie A.
BSBA FM 2-C
SALES REVENUE CAPITAL EMPLOYED

Gross profit can get by subtracting the revenue from cost of goods sold.
Operating profit can get by subtract gross profit from summation including expenses such as
utilities, rent, depreciation, salaries, etc.
Net profit can get by subtracting total revenue from total expenses.
Capital employed can get by subtracting total assets from current liabilities.

Next group of ratio analysis is liquidity ratios. Liquidity ratio is used to determine if a
company has a sufficient cash or equivalent current assets are able to pay its obligations within a
specific due time period. Users of liquidity ratio are shareholders, lenders, and suppliers. This
current ratio can be compute using the formula current assets divided by current liabilities.

EVALUATING CURRENT RATIO:

If the result is 1.5- 2.5 (acceptable liquidity & efficient management of Working Capital.
If the result is below 1 (possible liquidity problems and should be take some actions).
If the result is in high ratio (too much working capital that tied up in inventories or debtors.

In short the higher the ratio result, company are able to pay its obligation while the lower ratio
result can lead to liquidity problems.

Aside from current ratio, there`s also acid test ratio. Acid test ratio is better to use than
current ratio simply because of its calculation factors in fewer items, based on the video
inventories are excluded.

Last group of ratio analysis is financial efficiency ratios. Financial efficiency ratios
measures how the company manage its assets and liabilities to become effective and efficient of
a business concern. This ratio includes the assets turnover, stock turnover, debtor days and
creditor days. Users of this ratio are shareholders, lenders, and competitors. This can be
computed using the corresponding formula.

ASSETS TURNOVER= REVENUE/ SALES

NET ASSETS

Is served as the indicator to measure how efficient of a business used their assets to generate
revenue.

For stock turnover ratio,

STOCK TURNOVER= COST OF SALES

Sevilla, Renz Marie A.
BSBA FM 2-C
AVERAGE STOCK HELD

Is used to measure the number times of stocks that is sold or used in a given period of time.
The higher the ratio result it is better while lower ratio result has a problem within stock control.

DEBTOR DAYS= TRADE DEBTORS

REVENUE/SALES

Is used to measure how quickly cash is being collected from debtors.

CREDITOR DAYS= TRADE PAYABLES

X365
COST OF SALES

Is used to measure the number of days a business pay its suppliers.

Another topic that been discussed in the video is all about cash flow and funds flow
statements. Funds flow statement is a modern technique of analyzing financial statement. It
shows the changes in the working capital of a business to the operation at one period of time.
This is used to compare the two balance sheet if there`s a reason of changes. Funds are the
excess of current assets divided by liabilities while flows is a tool or technique that used to
determine if there`s any changes. In other words, funds flow statement shows the movement of
funds of a concern business. On the other hand, cash-flow statement is a statement used to
measure how much money are the in and out flows during the period of time. Cash flow
statements includes operating activities, investing activities, and financial activities. Operating
activities uses cash from business, it shows how business generated cash to product services.
Investing activities commonly used to purchase non-current assets and long term assets that
might be used for business future. Financing activities serve as the insight of investors into a
company in order to know their financial status.

There are two (2) method; direct and indirect method. Direct method starts with cash
transactions while indirect it started from adding all net income and rule items.

All in all, this financial statements such as income statement that measures business
performance over a given period of time to determine if they are gaining profit or loss, balance
sheet also known as statement of financial position that considered as the snapshot of business
assets and liabilities, cash flow statement shows how the business has generated and disposed
cash during period of under review. This financial statements serve as the basis to determine the
ratio analysis. It is essential for the business to know it if their business is function well and
Sevilla, Renz Marie A.
BSBA FM 2-C
achieving their two main objectives, profit and wealth maximization.