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Financial calculation - Essay Example

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Planning for a new business or expansion of a business today is never again a simple task. Globalization had caused factors that are previously 'foreign' to local business, becomes more and more influencing. …
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Financial calculation
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Download file to see previous pages Planning for a new business or expansion of a business today is never again a simple task. Globalization had caused factors that are previously 'foreign' to local business, becomes more and more influencing. Local producers cannot relax and keep producing mediocre quality products as foreign competitors entering the local market. The furniture industry for example, has become an international business rather than local. Local furniture producers in a country as far as Jamaica are threatened by the presence of US competitors ('Globalization and', 2003).The global environment has made planning a more complicated task as non-financial measurements are become increasingly important toward business forecasts. Specific preferences of the industry, habits of international competitors, and other non-financial factors must be considered, to prevent bias reporting of financial forecasts. Nevertheless, financial performance is still the main indicator of corporate success or failure. This is why the financial calculation has always been incorporated within academic studies.Financial performance of a corporation can be evaluated by observing financial ratios. Financial ratios are indicators designed to elaborate certain aspects or corporate financial performance. Different aspects are elaborated by different ratios. There are four types of financial ratios, they are:Profitability ratios display the rate of return resulted from company operation over a certain period. The amount of profit itself is not sufficient to describe corporate performance over the period. Excess of revenue over expenses are compared to total sales and corporate assets in order to obtain a ratio that describe how much money resulted from existing assets (Financial Ratios, n.d). Several profitability ratios are profit margin, return on equity and return on total assets:
Ratios
2003
2004
2005
Profit margin
30.00%
18.75%
11.67%
Return on asset
15.38%
17.44%
7.29%
Return on equity
35.29%
31.91%
12.73%

According to corporate financial statement, Fine furniture is experiencing a significant decline over the last three years. In order to properly assess corporate performance we actually ought to compare corporate ratios with industrial average. However, comparison of the three periods available has clearly displayed significant downward shift. The ratios indicated that profitability performance decline more than 50% over the past two years. Due to limited data available, we are using end of year numbers to calculate the financial ratios, instead of average numbers.

Liquidity Ratios
Liquidity Ratios display corporate ability to pay short-term debt. The ratios compare liabilities of the company to existing assets, to see how many assets are available to guarantee each dollar of corporate short-term loan. The most well known liquidity ratios are current ratio and acid test ratio:

Ratios
2003
2004
2005
Current Ratio
1.24
1.89
1.57
Acid Test Ratio
0.86
1.19
0.79

Fine furniture displayed average liquidity performance regarding liquidity ratios. The best performance was during the year 2004. Current ratio increases during 2004, but decreases again during 2005. Similar patterns are shown by the Acid Test Ratio.

Solvability Ratios
Solvability ratios have similar functions to liquidity ratios. However, solvability ratios concern long term instead of short term corporate abilities to meet existing obligations. Solvability ratios include debt ratio, gearing ratio and equity ratio.
Ratios
2003
2004
2005
Debt Ratio
0.97
0.95
0.94
Gearing Ratio
0.06
0.08
0.10
Equity Ratio
0.44
0.55
0.57

According to financial statements, Fine Furniture has not seemed to take full advantage of long term debt possibilities. This is revealed by the gearing ratio, which displayed that only a very small portion of the capital is financed using long term debt. However, the debt ratio described acceptable ...Download file to see next pagesRead More
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