Paper On Liquidity And Profitability

1. What is the purpose of financial statement analysis? The purpose of financial statement analysis is to provide information used by the business, potential creditors and investors.

Profitability ratios are used to measure the overall efficiency of thebusiness, as well as management effectiveness. Examples of profitability ratios include the gross margin ratio and the net margin ratios.

The profitability ration in a financial analysis is the ability of the organization to generate a profit. This ratio looks at areas such as net income, revenue, gross profit, earnings before taxes and interest and operating profit to name a few. Profitability shows the bottom line numbers for a company and is the goal that most organizations strive for. Ratios examined were gross profit margin and net profit margins

Financial Statement Analysis is the process of reviewing and analyzing a company’s financial statements to make better decisions. These statement includes the Income statement, Balance sheet, Statement of cash flows and a statement of changes in equity.

Profitability ratios provide insight into how much profit a company generates with the money that shareholders have invested in the company. Profit margin, return on equity, and earnings per share are all forms of profitability ratios (Stocks Simplified, 2011).

Financial statements are used to determine the business activities of a firm and the role of accounting analysis is to determine the accuracy and quality of the information provided. This analysis would look into the degree of its accounting figures captures its business reality through the policies used and its resulting noise, potential forecast errors and its impact on Myer’s profit.

By using profitability ratios, investors can measure the income or operating success of a company for a given period of time.

The next three ratios to be examined are considered profitability ratios, figures which show the company’s ability to make “investment and financing decisions” or “how effectively a firm’s management is generating profits on sales, total assets, and, most importantly, stockholders’ investment”, (Moyer, et al., 2007).

Ford Motor Company is one of the largest United States automotive corporation company. The success of Ford Motor Company can be measured by analyzing and computing the three different valuation ratios, three different profitability ratios, and three financial strength ratios for three consecutive years. The outcome of the results can determine if the Ford Motor Company is a good investment. To enable investors and creditors to analyze these goals, Ford Motor Company distributes annual financial statements. With these financial statements, liquidity of Ford Motor Company is measured by analyzing factors such as the market value, market book value, price earnings ratio, enterprise value ratio, which provides the valuation ratios. Profitability ratio is the ability of business to earn a satisfactory income, which consist of gross

Financial statement measures the financial performance, liquidity and strength of the firm, it is important

Every company for example Wal-Mart worries about its profitability. One of the most regularly utilized implements of financial ratio analysis is profitability ratios which are utilized to figure out the bottom line of the company. Profitability measures are vital to corporation managers and owners alike. If a small industry has outside stockholders who have put their own money into the corporation, the primary owner surely has to show profitability to those equity stockholders. (Blanchard, 2008)

Profitability (performance) ratios are used to assess a company’s ability to create equity as compared to its debt and other appropriate expenses created during a particular time frame. A favorable analysis of profitability ratios will reveal that a company’s value is higher than a competitor’s value.

Profitability ratios refer to the relative measure to what an actual created profit. Through these ratios the company is allowed to see how profitable the company. In addition it can serve as an examination of the overall performance of the company’s operations and how do these compare to past performances or other companies. The ratios in which accounting measures the profitability of a company are Profit Margin, Price over Earnings, Return on Equity and Return on

have explained that the Financial statements provide asummarized view of the financial position and operations of a firm. Therefore, much can belearnt about a firm from a careful examination of its financial statements as invaluabledocuments / performance reports. The analysis of financial statements is, thus, an important aidto financial analysis.

The way of working capital management can have a significant impact on both the liquidity and profitability of the company (Shin and Soenen, 1998). The main purpose of any firm is maximum the profit. But, maintaining liquidity of the firm also is an important objective. The problem is that increasing profits at the cost of liquidity can bring serious problems to the firm. Thus, strategy of firm must be a balance between these two objectives of the firms. Because the importance of profit and liquidity are the same so, one objective should not be at cost of the other. If we ignore about profit, we cannot survive for a longer period. Conversely, if we do not care about liquidity, we may face the problem of insolvency. For these reasons working capital management should be given proper consideration and will ultimately affect the profitability of the firm. Working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand( Eljelly,2004). Lamberson (1995) showed that working capital management has become one of the most important issues in organization, where many financial managers are finding it difficult to identify the important drivers of working capital and the optimum level of working capital. As a result, companies