A subjective measure of how well a firm can use assets from its primary mode of business and generate revenues. This term is also used as a general measure of a firm's overall financial health over a given period of time, and can be used to compare similar firms across the same industry or to compare industries or sectors in aggregation.
Methods of Financial perfomance Analysis:
This is the method in which the ratio between two or more variables related to the business is compared. There are many ratios used to analyze financial statements:
• Liquidity Analysis Ratio: For example, the net working capital ratio is calculated between net working capital and total assets. • Profitability Analysis Ratio: For example, return on assets ratio is calculated between net income and average total assets. Profit margin ratio is calculated between net income and sales. Earning per share is calculated between net income and number of outstanding shares. • Activity Analysis Ratio: For example, asset turnover ratio is calculated between sales and average total assets. Inventory turnover ratio is calculated between cost of goods sold and average inventories. • Capital Structure Analysis Ratio: The most important ratio is debt to equity ratio, which is calculated between total liabilities and total stockholder's equity. • Capital Market Analysis Ratio: For example, dividend ratio is calculated between annual dividends per common share and market price of common stock per share. All these ratios are collectively used to carry out the financial analysis of business to assess growth, profitability, and solvency of a business. Remember that ratio analysis is as important as horizontal and vertical analysis and must not be overlooked.
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