The Financial Policies - Essay Example

1. There is no single or correct value for a ratio. Normally, the ratio value may be too low or too high in comparison to a reference value. Ratios can therefore mislead especially when they are not combined with the economic need and management of the company. Therefore, one must consider the products, competitors, and the vision of the company.
2. It is generally hard to define the goodness- appropriateness of the ratio or its badness. Ordinarily, a high cash ratio is historically classified and may be interpreted as a good sign especially when the company is growing, but could also interpret as a sign that the company is no longer a growth company.

• The diversified accounting practices changes comparisons even within the same company e.g., leasing and buying equipment, LIFO, and FIFO.

1. The inflation also changes the company's balance sheet hence affecting the profits accrued from the organization. Therefore, ratio analysis of one company over time or a comparative analysis of companies of different ages must be scrutinized with understanding (CFA, 2009)

1. Free cash flow and its importance
2. Free cash flow is the amount of cash that a firm has in the bank at any given time after all of its bills and payables are accounted for. It is determined on a daily, weekly, monthly, or yearly basis. Free cash flow is given by the total cash flow or the earnings with noncash charges added back in, minus capital spending.
3. Free cash flow is important in the progress of any business because of an excellent indicator of the strength of the marketplace. It normally focuses on the ability to pay bills and the remaining cash invested in growth and expansion projects. It is vital in assessing the financial health of the company because it strips away all the accounting assumptions built into earnings

• Free cash flow is vital and it represents the operating cash flow after interest, the cash taxes, and normal capital expenditures. This is the cash flow that is available to a firm or a company used for dividends, debt repayment, or the acquisitions of a new business. Investors use free cash flow in the evaluation of stock prices, as the alternative to using EP. Normally, the free cash flow accumulates and it increases share value towards the shareholders.

1. The free cash flow is also vital because many firms rely on an accountant to give them information about their available free cash after the financial year. This is confirmed in the balance after bills, payroll, and any other expenses have been paid. This is to be used by the shareholders to see the progress of the business.

Workings

Current ratio- Quick ratio =1.5 – 0.75

(C.A /C.L)   -  {(C.A –Inventory-Expenses)/C.L} = 0.75

(-300000-1120000)/C.L =0.75

C.L =1893333

Current ratio =1.5 =C.A/1893333

C.A = 2840000

Inventory turn over =12 =COGS/150000 (average invent)

COGS = 1800000

Revenue = 290000 x 18.37 =5327300

Interest expenses =8% x 5327300 = 426184

TIE Ratio =8 =EBIT/426184

EBIT = 3409472

Fixed Asset Turnover = 1.5 =5327300/Average fixed asset

Average fixed assets =5327300/1.5= 3551533

Fixed Asset = 3551533 x 2 =7103066

Tribelike Entreprise

Income statement

For the year ended 2012

Revenue                      5327300

COGS                         (1800000)

PROFIT                      3527300

Retained earn              (117828)

EBIT                           3409472

Interest                                    426184

EBT                            2983288

EAT                            2983288

Balance sheet

As at 2012

Fixed Asset                               7103066

Current assets                            2840000

                                                     9943066

Current liabilities                     1893333

Profit                                         3527300

Owners equity                            1450000

Reserves                                      3072433

                                                      9943066