Investment Tracking

Weekly Assessment

USEFUL NOTES FOR:

· Analysis of key financial ratios relevant to the firms

Introduction

The analysis of key financial ratios relevant to the firms is very important for investors as it helps them make informed decisions regarding future investments in companies.

· Return on Equity (ROE)

Return on Equity (ROE) is a ratio that compares net income to the book value of common equity. ROE measures the rate of return earned by a company’s shareholders during a given period. It’s calculated as:

o ROE = NI/SE

Return on equity (ROE) is a financial ratio that measures a company’s profitability relative to its shareholders’ equity. It is calculated by dividing the net income of the company for a period by the average total shareholder equity for that period.

The formula for ROE is:

(Net Income ÷ Average Total Shareholder Equity) / Average Total Shareholder Equity

o Interpretation:

DER is a measure of the company’s financial leverage. It should be less than 1.5 and increasing compared with previous year or previous quarter.

The following ratios can be used to interpret the financial position of a company:

Cash flow from operations (CFO) / Total assets = Cash flow from operations divided by total assets. This ratio provides an indication of whether a firm is generating enough cash to cover its needs for investments in capital projects or working capital, as well as repayments on debt obligations or payables for goods sold during a period; it also gives an idea about how efficiently management manages its resources during this period so that they do not run out before being able to meet all their obligations at hand

 Any score greater than 15% is considered good. However, an increasing trend in the return will be seen as positive. In order to achieve these returns, the company has to make investments that provide a high return. This is possible when proper investments are made in assets and working capital (inventory and receivables management)

Return on Equity (ROE) is a measure of how much profit a firm makes relative to the amount of shareholder equity it has. It can be calculated as follows:

Net Income / Shareholder Equity = Return On Shareholders’ Equity

o NI should be increasing compared to previous year or previous quarter

NI should be increasing compared to previous year or previous quarter.

NI is the net income for the year. It’s calculated by subtracting out all expenses from total revenues and then adding back in any taxes paid or payable during that time period.

NI is the profit after tax for this period, but it does not include any capital gains or losses (which are reported separately).

· Return on Assets (ROA)

Return on assets (ROA) is a financial ratio used to measure a firm’s profitability, as well as its ability to generate cash flow and growth. The formula for ROA is:

NI=Net Income/Total Assets

TA=Total Assets

o ROA = NI/TA

ROA = NI/TA

ROA = Net Income / Total Assets (NI is income and TA is total assets)

ROA = Net Income / Total Assets – Current Liabilities (NI – current liabilities)

ROA = Net Income/Total Assets – Current Liabilities + Long-Term Debt (NI – current liabilities plus long term debt)

 The score of 10% – 12%, is considered good. Any increase in scores will indicate good performance of the company with respect to its management of assets. For example, an increase in sales revenue with same level of assets will result in higher ROA. Similarly, a decrease in operating expenses will also help improve the ROA. The overall trend should be upwards which will indicate that management is making efficient use of its assets to generate more sales revenue and control costs simultaneously.

The score of 10% – 12%, is considered good. Any increase in scores will indicate good performance of the company with respect to its management of assets. For example, an increase in sales revenue with same level of assets will result in higher ROA. Similarly, a decrease in operating expenses will also help improve the ROA. The overall trend should be upwards which will indicate that management is making efficient use of its assets to generate more sales revenue and control costs simultaneously.

In this section we have included some key financial ratios relevant to banks: Return on Equity (ROE), Return on Assets (ROA), Debt-Equity Ratio (DER).

· Debt-Equity Ratio (DER)

The Debt-Equity Ratio (DER) is used to indicate the proportion of debt and equity in a company’s capital structure. DER = Total Liabilities/Total Equity

Derivative instruments are financial contracts whose values depend on underlying assets or indices; they provide benefits by reducing risk, but also carry risks if their value falls too far below that originally anticipated by either party. This can be prevented through hedging strategies such as forward contracts or swaps, which involve buying/selling derivatives at higher prices than current market prices so that one party can benefit from any future rise in price while still protecting itself from losses should it fall below its original cost basis

o DER = Total Liabilities/Total Equity

DER is a measure of leverage. It’s also known as the debt ratio or the debt/equity ratio, and it’s used to measure financial risk associated with a company. The higher your DER is, the more risky your firm is considered to be in terms of its ability to pay debts.

Conclusion

This analysis is very useful in determining financial ratios of a company and their trends. If you are interested in analyzing these ratios for your company, please contact us. We will help analyze these key financial ratios of a firm with respect to its investments and liabilities management.