Fiancial Analysis

FINANCIAL STATEMENTS ANALYSIS
1. Short term solvency analysis

Ratios of short-term solvency measure the ability of the firm to meet recurring
financial obligations ( that is to pay bills). To the extent a firm has sufficient cash flow, it
will be able to avoid defaulting on its financial obligations and thus, avoid experiencing
financial distress.
Accounting liquidity measures short-term solvency an dis often associated with net
working capital, the differences between current asstes and current liabilities.
Current liabilities are debts that are due within one year from the date of the balance
sheet.
The basic source from which to pay these debts are current assets.
The most widely used measures of accounting liquidity are the current ratio and the quick
ratio.
Current ratio = Total current assets/Total current liabilities = 4731012,8/1932026,8=
2,44
In general creditors like to see a high current ratio. If a company is getting into financial
difficulty, it will begin paying its bills more slowly, borrowing from its bank and so on, so
it current liabilities will be increasing. Here, current liabilities are not rising faster than
current assets, so its no spell for trouble. A higher current ratio could mean that the
company has a lot of money tied up in nonproductive assets, such as excess of cash or
marketable securities, or in inventory.
Quick ratio = Total current assets- Inventories/ Total current liabilities =
1383304,6/1932026,8 = 0.71
Inventories are typically the least liquid of a firms current assets; hence they are the
current assets on which losses are most likely to occur in a bankruptcy. Therefore, a
measure of the firms ability to pay off short-term obligations without relying on the
sale of inventories is important.
2. The Asset Management Ratios

The Asset Management Ratios are the ability of the firm to control its investments in
assets.
Total Asset Turnover.
To find out how effectively assets are used to generate sales, we must find out the total
assets turnover by dividing total operating revenues for the accounting period by the
average of total assets.
Total assets turnover = Total operating revenues / Total assets = 2823248/7358679, 5=
0.38
This ratio is intended to indicate how effectively a firm is using all of its assets. This
mean that the company is not generating enough volume of business given its total asset
investment. Sales should be increased, some assets should be sold, or a combination of
these should be taken.
Receivables turnover
The receivables turnover and the average collection period provide some information on
the success of the firm in managing its investment in accounts receivables. The actual
value of these ratios reflects the firms credit policy.
Receivables turnover = Total operating revenues/ Receivables = 2823248/ 12304158=
2.29
Average collection period =
Days in period
= 365 = 159,38
Receivables turnover 2.29
The firms collection period is very high, and the fact that a customer is paying late may
signal that the customer is in financial trouble and the firm may have a hard time in
collecting receivables.
Inventory turnover
The ratio of inventory turnover is calculated by dividing the cost of goods sold by
average inventory. The number of days in the year divided by the ratio of inventory
turnover yields the ratio of days in inventory, which represents the number of days it
takes to get goods produced and sold; it is called shelf life.
Inventory turnover = Cost of goods/ Inventory = 2810820/ 3347708,2= 0,82
Days in inventory =
Days in period
Inventory turnover 2002
= 365 = 445
0.82
The inventory ratio measures how quickly is produced and sold. From here we can notice
that the company is holding to much inventory. Excess inventory is unproductive and it
represents an investment with a low or 0 rate or return. With such a low turnover the firm
may hold obsolete goods not worth their stated value.
3. Profitability Ratios
One of the most difficult attributes of a firm to conceptualize and to measure is
profitability. In a general sense, accounting profits are the difference between revenues
and costs. Unfortunately, there is no completely unambiguous way to know when a firm
is profitable. At best, a financial analyst can measure current and past accounting
profitability. Many business opportunities, however, involve sacrificing current profits for
future profits.
The most important conceptual problem with accounting measures of profitability is that
they do not give us a benchmark for making comparisons. In general a firm is profitable
in the economic sense only if its profitability is greater than investors can achieve n their
own in the capital markets.
Profit Margin
Profit margins are computed by dividing profits by total operating revenue and thus they
express profits as a percentage of total operating revenues. The most important margin is
the net profit margin.
Net profit Margin = Net income / Total Operating Revenue = 45352,8/ 282312,8 =
0.1606
Gross Profit Margin = Earnings before interest and taxes / Total operating revenues =
61362RON/282312, 8 RON = 0.2173
In general, profit margins reflect the firms ability to produce a product or service at a low
cost or a high price. Profit margins are not direct measures of profitability because they
are based on total operating revenue, not on the investment made in assets by the firm or
the equity investors.
Return on assets
One common measure of managerial performance is the ratio of income to average total
assets, before tax and after tax. These ratios are:
Net return on assets = Net income/Average Total assets = 45352,8/7358679,5 = 0.0062
Gross return on assets = Earnings before interest and taxes / Average total assets =
61362/7358679,5= 0.0085 7358679,5
Return on equity
The ratio is defined as the net income divided by average common stockholders equity.
ROE= net income/ average common stockholders equity= 45352,8/ 155627,8 = 0.2914
Shareholders invest to get a return in their money, and this ratio shows how well they are
doing in an accounting sense.
4. Financial Leverage
Financing leverage is related to the extent to which firms rely on debt financing rather
than equity. Measures of financial leverage are tools in determining the profitability index
that the firm will default on its debt contracts.
The more debt has a firm, the more likely is that a firm will become unable to fulfill its
obligations. In other words, too much debt can lead to a higher profitability of insolvency
and financial distress.
On the positive side, debt is an important form of financing, and provides a significant
tax advantage because interest payments are tax deductible. If a firm uses debt, creditors
and equity investors may have conflict of interest. Creditors may want the firm to invest n
less risky than those the equity investors prefer.
The debt ratio is calculated by dividing total debt by total assets. We can also use several
others ways to express the extent to which a firm uses debt, such as the debt-to-equity
ratio and the equity multiplier.
Debt Ratio = total debt/ total assets=7203051,7/7358679,5= 0.9788
Debt-to-equity ratio = total debt/total equity = 7203051,7/155627,8=42.26
Equity multiplier = total assets/ total equity = 7358679,5/155627,8 = 47.28
Debt ratios provide information about protection of creditors from insolvency and the
ability of firms to obtain additional financing for potential attractive investments
opportunities.
However debt is carried on the balance sheet simply as the unpaid balance. Consequently,
n adjustment is made on the balance sheet for the current level of interest rates or risk.
Thus, the accounting value of debt may differ substantially from its market value.

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FINANCIAL STATEMENTS ANALYSIS

1. Short term solvency analysis

2. The Asset Management Ratios

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