Profitability Profitability ratio is to measure the efficiency of a business and profits generate by the business. High selling price and reduction in operating costs could show an improvement in profitability. There are 2 types of Profitability Ratios which will be discussed below, namely ; Gross Profit Margin and Return on Capital Employed. Gross Profit Margin Gross profit margin is a company's total revenue deduct its cost of goods sold divided by total sales revenue and stated as a percentage.[ http://www.investopedia.com/terms/g/grossmargin.asp] A company's cost of goods sold means the expense related to raw materials, labor and manufacturing fixed assets which use to generate profit. The gross profit margin number appears …show more content…
For example, cash or current assets can be easily and quickly converted into cash and made available to meet every RM1.00 current liabilities. Based on 2015, Apom Bhd’s acid test ratio of 0.63 indicate in the short term with quick assets available to meet every RM1.00 of current liabilities, a short of RM0.37. Acid test ratio was under the rule of thumb 1.0 time in 2015 which indicates that it has no adequate quick assets to meet its current liability obligations. On the other hand, the company may apply for overdraft facilities to minimise the problem of low acid test ratio. There is an improvement of the acid test ratio from 0.632 time on 2015 to 1.11 times on 2016 and show higher than the rule of thumb of 1.0 time. This is suggested that the company had held a huge amount of bank balance. The company should seek to invest the surplus liquidity. Return on Investment and Risk Earning Per Share There are 2 types of ratios for Return on Investment and Risk which will be discussed below namely namely; Earning Per Share and Dividend …show more content…
Relevance requires information of financial statement to be used by users and expected to affect their decision. Verifiability requires information should be free from error, reliable and accurate without omissions. If the purpose of the information given is to affect user’s decision in a particular way then it could not be reliable. It is more ideal for financial reporting to produce both more relevant and reliable information. However, it may be essential to give up some of one quality for a gain in another. The potential conflicts do usually exist between relevance and reliability. Both relevance and reliability are two competing characteristics on the accounting information. In order to make financial information more reliable and a trade-off exists which lead to information less relevant and vice versa. When accounting information provided in time is relevant. But it is uncertain and less reliable at early stages. Relevance of accounting information is lost if users need to wait to gain while information gains
Current Ratio – For the last three years was growing from 3.56 in 2001 to 3.81 in 2002 to 4.22 in 2003. The reason of grow is increased in Assets. Even though Liability was growing, Asset grow was more significant.
It suggested that people use information cues to make decisions about future events. The issue of how and whether information cues are used in decision making is very important to accounting professions. The model was being used as an analytical framework and the basis for most judgement studies: prediction and evaluation (Slideshare.net) In 1970, Paul and Virgil found that earnings and sales information were always obtained by financial analysts to predict financial returns on particular shares. This investigation was further agreed by Mear and Firth in 1987. Furthermore, there was also studies on addressing whether decision makers will make different decisions if relevant information are provided with the within the financial statements. A loan officer can make different judgments about an entity’s ability to repay a loan depending on if the accounting professions include footnote that provides details on liability account on the statement. Another disclosure issues that Stallman (1969) found that providing information about industry segments can reduce decision maker’s reliance on past share prices when they make choices to select particular securities. Therefore, knowing what and how information will be used by readers will help the accounting professions to determine what and how to present relevant information in a financial report, and this will
It is the ratio of current assets over current liabilities. It determines the financial health of a company to pay off its short term obligations.
The horizontal analysis shows that IQ’s total current assets increased by 25% and its total current liabilities increased by 40% during 2005. This is largely explained by the increase in trade receivables, the increase in inventory, the increase in trades payable, and the increase in term loans (notes 5, 6, 12, and 13 of the 2005 financial statement). The higher increase in total current liabilities than in total current assets explains why the current and acid-test ratios decreased from 4.66 to 4.17 and from 4.02 to 3.5, respectively. However, IQ seems to remain highly liquid considering the values of the mentioned liquidity ratios.
...health of a company. For example, gross profit and net profit ratios tell how well the company is managing its expenses (Berman and Knight, 2008). Return on equity (ROE) explains how well the company is using its own assets/equity to generate returns (Berman and Knight, 2008). Additionally, return on investment tells whether the company is generating enough profits for its shareholders (Berman and Knight, 2008). Again, a higher ratio or value is desirable. A higher value means that the company is doing well and it is good at generating profits, revenues, and cash flows.
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
They help to establish the performance and state of a firm’s operations that would otherwise not be reflected by individual item in the financial statements (Ittelson, 2009). The ratios help in identifying different aspects of a firm’s performance including profitability, liquidity, and financial leverage of a firm among others. This article determines the profitability, liquidity and the financial leverage of Coca-Cola Company.
Profitability ratios express ability of the company to produce profit. This shows how well a company is performing in a given period of time. To compare the profitability for the companies, the investors use profitability ratios that are return on equity, profit margin, asset turnover, gross profit, earning per share. Return on asset indicates overall profitability of assets. It is the relationship between net income and average total assets. GM has 0.034 and Ford has 0.036. This indicates Ford is more profitable. Profit margin is how much of every dollar of sales the company keeps. Computing profit margin, net income divided by net sales. This indicates higher profit margin is more profitable and it has better control. Thus, GM’s profit margin is 3.4 percentages and Ford’s is 4.9 percentages. This indicates Ford has better control profitably compared to GM. Next ratio is gross profit rate. It is how much of every dollar is left over after paying costs of goods sold. Assets turnover represents how efficiency a company uses its assets to sales. This ratio is relationship between net sales and average total assets. GM’s is 0.98 and Ford’s is 0.75. This result represents GM is using its assets more efficiently. Gross profit margin is dividing gross profit, which is equal to net sales less cost of gods sold, by net sales. This ratio indicates ability to maintain selling price above its cost of goods sold. GM’s gross profit rate is 11.6 percentages. Ford’s is 5.7 percentages. GM is higher ratio, and it indicates strong net income. Also, it indicates the company has to spend lower operating expenses and the company is able to spend left money for covering fixed costs. Earnings per share indicate the company’s net earnings to each share common stock. This ratio shows margin between selling price and cost of goods sold. From these companies’ income statement, GM is $2.71 and Ford is $1.82. Because GM’s value is higher relative to Ford’s,
This ratio is the same as the current ratio except it excludes inventories. The ratio concentrates primarily on the more liquid current assets, marketable securities and receivables in relation to current obligation. It shows whether a company’s cash -- along with items that can be quickly converted to cash – is sufficient to cover short-term obligations. Most companies prefer at least a 1-to-1 ratio; firms with smaller ratios need to turn over their inventories faster. So Wal-Mart acid test liquidity in 2014 is 0.24 and in 2015 it is 0.28 they are increasing but they are still not meeting their goals which are 1-to-1
Credibility is linked with similar events, which produce similar results. If companies were doing a similar event in order to produce financial reports, which disclosed totally different results the company could lose their credibility, this is because companies can choose different accounting policies. It is important if financial statements disclose a true and fair view.
Acid test ratio is a liquidity ratio that shows the ability of a company to pay off its current liabilities with quick assets. The acid test ratio is a better measurement than current ratio as it provides a more rigorous assessment of a firm’s ability to pay its current liabilities. Current assets that are not readily convertible into cash are excluded from the calculation of acid test ratio such as inventory. These assets are being eliminated because their conversion into cash may take considerable time. Acid test ratio is important as it used to evaluate whether a company has sufficient cash to pay for immediate obligations. If a company has enough quick assets to cover its current liabilities, then the company will be able to pay off its debts instead of selling off its long-term assets to cover its current liabilities. A high acid test ratio indicates a company is able to sustain its business because the company’s current operations are making enough profits to pay off current
The analysis of these ratios shows how Ford stands as a company for the past five years. Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For long-term investing with great rewards, companies that have high return on equity ratios can provide the biggest payoffs. This ratio also tells investors how effectively their capital is being reinvested, so it is a good gauge of management's money handling skills. Ford is showing a considerable turn around in this area this past year, which could easily be due to changes in management. They are also reasonably following the industry in this area.
Most businesses establish for the purpose of generating profit so they use different strategies to reach customer satisfaction. Firms establish the best suitable strategy that can generate the maximum rate of profitability. However, it is not simple to reach the stability stage in the business where the business achieve its target profit and can move forward unless the business pass through numbers of stages. Every business regarding it is new or old, small or large, it aims to generate profit. When the purpose became about profit, the management of the firms had to give a huge attention to profitability. The importance of profitability appears in every stage in the business so the management or the owners should have enough knowledge about profitability. Because of the aggressive competition in the market, the companies must compare their performance with the other companies to measure its progress. So it is not enough to have enough knowledge about profitability as it appears that management should know how to analyze its performance and measure it. Because of this reasons, the importance of profitability ratio analysis began to appear. Where they give the companies the chance to measure how good they really are comparing to the others firms in terms of profitability.
Material information influences the economic decisions of the users and is therefore relevant to their needs (Relevance). It is also linked with reliability. Omission or misstatement of an important piece of information reduces users’ ability to make correct decisions taken on the basis of financial statements thereby affecting the reliability of information. Moreover, information contained in the financial statements must be complete in all material respects in order to present a true and fair view of the affairs of the company. This is known as
The gross profit margin lets us know the benefit an organisation makes on its cost of offers, or expense of products sold. At the end of the day, it shows how effectively administration utilisation work and supplies in the production process. Organisations with high gross margins will have a great deal of cash left over to use on different business operations, for example, research and development or marketing. It's vital to remember that gross profit margins can differ from business to business and from industry to industry. For example, the airline industry has a gross margin of about 5%, while the software industry has a gross margin of something like 90%. Anyhow as you can see Signature business, the gross profit margin was 1.9% less than the industry average, which isn't useful for the organisation and shows that more sales were required. Also there is no much difference between the gross profit and the industry average and it won't influence the business badly because of its small percentage differences. To enhance this, less money required to be used on such purchases and stock.