Every business should have a Financial Performance Evaluation, and Ratio Analysis is done to keep on top of the business’s financial health. Making money is how every business functions and keeps its doors open. Therefore, there must be a Financial Performance Evaluation and Ratio Analysis done regularly for the business.
Here are the reasons every business needs the Financial Performance Evaluation and Ratio Analysis.
- Investors can analyze balance sheets and profit and loss accounts using ratios.
- Financial statements are normally not easily understood by some investors. So, the performance evaluation through ratio analysis will help the investors summarize and a systematic long array of accounting figures to make them more understandable.
- Performance evaluation is useful for diagnosing the financial health of the enterprise.
- The study will also help the investors locate the weak spots in the business even though the overall performance is good. For example, investors find that the increase in distribution expense is more than proportionate to the
- This study will help the investors to make an intercompany comparison to decide the best company to invest in. This study will also help compare the performance of different units belonging to the same company, known as an intercompany comparison.
- Investors will be able to judge the earning capacity, financial soundness, and operation of the company.
- Investors will be able to judge the credit standing of the company.
- This study should predict the prospects of the company.
Business Definition for financial performance evaluation is ” Cumulative consideration of factors (that may be subjective or objective) to determine a representative indicator or appraisal of an individual or entity’s activity or performance about some subjective (or standard) over a while. Factors to consider may include the degree of goal attainment, how items are measured, and what standards are to be applied”.
The financial performance evaluation is usually related to how well a company can use assets, shareholder equity, liability, revenue, and expenses. Performance evaluation measures the overall efficiency and performance of a company. It is also used to analyze the company’s past financial performance and establish the future trend of financial position.
Often, the decisions and recommendations are acquired from the evaluation about providing capital to companies – specifically, whether to invest in the company’s debt or equity securities and at what price. An investor in debt securities is concerned about the company’s ability to pay interest and repay the principal lent.
An investor in equity securities is an owner with a residual interest in the company and is concerned about its ability to pay dividends and the likelihood that its share price will increase.
Major statements used in financial performance evaluation
A complete set of financial statements includes a balance sheet, statement of income, statement of comprehensive income, statement of changes in equity, and cash flows. However, normally, Income statements, balance sheets, and cash flow statements are basic statements used for financial performance evaluation, interpreting the quantitative data of a company’s performance. The publicly traded companies publish their financial statements quarterly.
Balance sheet
The balance sheet is also called a statement of financial position or statement of financial condition. It presents a company’s current financial position by disclosing the resources the company controls (assets) and its obligations to lenders and other creditors (liabilities) at a specific point in time. Owner’s equity represents the excess of assets over liabilities. This amount is attributable to the company’s owners or shareholders.
Income statement
The income statement is also known as the statement of operations or profit and loss statement. The income statement presents information on the financial results of a company’s business activities over some time. It also communicates how much revenue and other income the company generated during a period and its expenses to generate that revenue and other income.
Cash flow statement
Cash flow is also vital to a company’s long–term success. The cash flow statement classifies the company’s cash flows into three categories: operating, investing, and financing. Cash flows from operating activities are those cash flows not classified as investing or financing and generally involve the cash effects of transactions that enter into the determination of net income.
Cash flows from investing activities are those cash flows from activities associated with the acquisition and disposal of long–term assets. Cash flows from financing activities are those cash flows from activities related to obtaining or repaying capital to be used in the business.
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