Measures of Financial Efficiency

A company's financial analysis allows it to determine its current state, opportunities, and problems. This valuable information is used both for making current management decisions and for strategy development. Investors, shareholders, and business owners are also interested in obtaining such information. Specialists should carry out this analysis. Therefore, if you are suggested to buy essay cheap which will tell everything about financial efficiency, do not be fooled by such offers.

What does the analysis of financial performance provide?

The analysis of financial performance is one of the methods for assessing the state of an enterprise and its capabilities in the future. It serves as a basis for strategic planning, helps managers identify resources and areas of further development of the enterprise, finds its strengths and weaknesses. Analysis of financial ratios is carried out to identify the best ways to achieve the company's objectives, such as increasing business activity — asset turnover, ensuring liquidity and financial stability, and increasing the company's profitability. The analyst must understand a variety of figures from accounting and management reporting to be able to determine the effectiveness of the current activities of the enterprise and develop recommendations for its increase.

The main groups of financial efficiency measures

More than 200 ratios are used in financial analysis. They all characterize the four main sides of the company's activity:

  • Liquidity — The company's ability to pay its obligations at the expense of current assets is one of the conditions of its financial stability. The liquidity ratios allow to estimate it adequately;

Financial Efficiency: Why financial performance analysis is important?

  • Asset turnover — Turnover ratios allow us to evaluate the effectiveness of asset and capital management of the enterprise. The basis for their calculation is revenue from sales of products or services, its ratio to the average annual amount of assets, accounts receivable, and accounts payable;
  • Profitability — Profitability ratios reflect the degree of profitability of an enterprise. They are calculated as the ratio of profit to the indicator's value, the profitability of which we find. Indicators for calculating profitability ratios are taken from management or accounting data. The higher the values, the more effectively the analyzed resources of the enterprise are used;
  • Market value — The analysis of market activity makes it possible to conclude how the market assesses the efficiency of financial and economic activity of the company, the rationality of its dividend policy, and, most importantly, its attractiveness for shareholders or investors.

They may differ depending upon the analysis objectives and intended users of the information.

Four important aspects of the analysis of financial efficiency

In order to conduct an adequate analysis of the financial performance of an enterprise, it is necessary to:

  1. Have a complete description of the company's financial activities for the period under analysis — a report on financial results, cash flow, balance sheet, etc.
  2. Compare the ratios for different periods as well as to compare with the average statistical values in the industry, the results of competitor companies;
  3. Compare the values obtained with the recommended, taking into account the specifics of the company's economic activity. For example, the limits of the norm differ for trade and manufacturing.
  4. Carry out the analysis of indicators as a whole. For example, the liquidity ratio by itself is not very informative. In order to get an objective picture, it is necessary to analyze the indicators of different groups — turnover, financial stability, and profitability.

By calculating financial indicators, it is possible to learn about the current state of affairs at the company and assess its prospects. The competent analysis will allow to correctly build a development strategy, improve the concepts of asset management and the attracted funds of the company. The main source of information is company reports, which should be monitored more often.

Author’s Bio:

Eva Castleberry is a freelance content writer. She is interested in a wide range of fields, from education and online marketing to personal entrepreneurship. She is used to handling many writing orders at the same time and understands the importance of writing clearly and concisely. She has been a contributor for Essayshark since 2018.