Corporate Finance and Formulas of Ratio Analysis Finance Essay

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Corporate finance is defined as, the finance study with financial decisions business enterprises make and the tools and analysis used to make these decisions. Or A company division alarmed the financial operation. In most businesses raising money in corporate finance in different projects. Corporate finance is the method of raising funds or assets for any kind of expenses. Customer’s business firms and normally governments do not have the funds that they make to perform their operations and the funds that could earn dividends put the original use. The capital agencies including commercial banks savings and loan family are used the glory loan and funds of business. The nonblank organization or firm recognizes the union and investment companies. Finance has three parts which is business finance personal finance and public finance. The shareholders the benefit money investment loses into different way of current assents and other assets. Corporate finance tells us and set of scales the needs of employee’s customers and suppliers’ safety of the shareholders.

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Ratio analyses of the range industrialized company.

Profitability ratio

The ratios measures that specify how fine a firm are performing in terms of its ability to make profit.

Following ratio are used to indict the profitability of a company.

Operating margin ratio

Financial Classes show that help to improve a business’s skill to make money as compared to its fixed cost and other valid costs during a particular stage. When these rations are higher than a competitor’s ratio or than the company’s ratio are preceding the given time that the company is doing well and make progress. These ratios are helpful both the lender and saver t know the current state of the company and give more benefit of owners and manager of the company. These consider the primary ratios.

Net profit margin ratio

X 100

Net income ratio of Spectrum Company 2006

(944/21,900) x 100= 4.54%

Net income ratio of Spectrum Company 2007

(836/27,450) x 100= 3.05%

Net income ratio of Spectrum Company 2008

(552/21,015) x 100= 2.63%

Net income scope ratio of Spectrum Company goes downward. NPR of spectrum company in 2006 is 4.54 percent and when company comes in 2007 it goes to lose by about 1.49 percent and make at 3.05 percent and in 2008 its 2.63 percent this shape clearly shows that their income fall down year by year which is not a good sign for the holder and management of the company because it give bad feeling to the saver and lenders.

Gross profit margin

What remains from sales after a company pays out the cost of goods sold. To get gross profit margin split gross profit by sales. Gross profit margin is expresses as a profit.

Formula

X 100

Gross profit margin ratio of Spectrum Company 2006

(3525/21,900) x 100= 24.32%

Gross profit margin ratio of Spectrum Company 2007

(6225/27,450) x 100= 22.67%

Gross profit margin ratio of Spectrum Company 2008

(5895/21,015) x 100= 28.05%

Gross profit ratio outline prove a good result of the company it is 24.32 percent in 2006 but it cut down in 2007 came on the 22.67percent but in very next year spectrum company improved soon and their gross profit ratio goes positive to the 28.05 percent it mean company have a good manage over their manufacture cost gives good net sales to their owners.

Net asset turnover

Net assent defined as, Net sales divided by total assets. Net asset turnover ratio show how good assets are used to produce income and benefit. Also called total asset turnover.

Formula

Capital employed= Total asset – current liability

Net asset turnover ratio of the spectrum company 2006

(21,900/5878)=3.73 times

Net asset turnover ratio of the spectrum company 2007

(27,450/7810)= 3.51 times

Net asset turnover ratio of the spectrum company 2008

(21015/8626)= 2.44 times

In 2006 company net asset turn over ratio was 3.73 times but company did not sustain this shape promote and it declined minor in 2007 come on 3.51 times and it comes 2.44 times in the present year which is not a fine mark for the company its mean that company make less profits.

Operating margin ratio

A ratio used to measure a company’s pricing strategy and operating efficiency.

Formula

x 100

Operating profit of Spectrum Company 2006

(1832/21015) x 100= 8.71%

Operating profit of Spectrum Company 2007

(2222/27450) x 100= 8.09%

Operating profit of Spectrum Company 2008

2377/21900) x 100= 10.85%

Overalls its mean procedure of set cost of spectrum company improved year by year in 2006 it was 8.71 percent but in 2007 it was 8.09 percent company try to take it down its handling of fixed cost but company cannot take this drive further way from 2006 and reach on 10.85percent.

Return on capital employed (ROCE)

Go back on capital employed is used in finance as analyze of the return that a company is realizing from its capital employed. It is usually used as a measure for comparing the act between businesses and for assessing whether a business generates enough income to pay for its cost of resources.

Formula

x 100

Return on investment of Spectrum Company 2006

(2377/5878) x 100= 40.44%

Return on investment of Spectrum Company 2007

(2222/7810) x 100=28.45 %

Return on investment of Spectrum Company 2008

(1832 /8626) x 100= 21.24%

The company shows the location about their earning. In 2006 it go back on deal 23.03 % which not bad but next year it slowly declined 18.54%. The business gain value slowly and business lose land but earning little profit. ROCE shows that business gaining or loss its resources.

Leverage ratio

Any ratio used to calculate the financial control of a company how to solve the problem and get an idea of the company and way of financing to calculate the skill to meet financial obligations. There are the different ratios that maintain the factors of debt justice and resources to get the fixed cost. OR

A ratio is using to measure the company mix operation about cost given design and how to changes the produce to earning income. A company received more benefit to use different ratios. Fixed and variable costs are the two types of in use costs depending on the company and the business the mix change.

Following ratio give output in the force ratio and is organism used to understand the leverage of the company.

Capital gearing ratio

Universally linked to solvency ratio is the capital gearing ratio. Capital gleaning ratio is mostly used to study the capital makeup of a company. The term capital deal refers to the relation between the range of long term form of financing such as debentures favorite and fairness share capital with capital and surpluses. Leverage of capital structure ratios is calculated to test the long term financial position of a firm.

The term assets Gearing or power usually refers to the total relationship between equity share capital plus capital and surpluses to desired share capital and other fixed interest bearing funds or loans.

Formula

x 100

If the company is much geared so he might be look some difficulties in prospect to get finance from bank or from saver. This ratio is the main for a company in value of their current sponsor or for the future investor. Because this ratio can straight affect the ability of the company is able to retain bonus policy during its bad period.

Capital gearing ratio of spectrum company2006

(1779/5878) x 100=30.27%

Capital gearing ratio of spectrum company2007

(3302/7810) x 100= 42.28%

Capital gearing ratio of spectrum company2008

(4770/8626) x 100= 55.30%

According to above statement the ratio the financial state of Spectrum Company going from bad to bad. Because in 2006 its capital gearing was 30.27 percent which not bad it mean still company more support as compared to their liabilities but it go high in 2007 which is 42.28 percent at that it is a care sign for the company but because of the ineffective management this angry its 50 percent figure at reach at 55.30 percent company become highly gearing state at this flash it clearly show the financial makeup of the that company did not have enough money for re payment of their loan and might be company come on the circumstances of the bankrupt. This is disappointing stage for the owner of the company.

Debt/equity ratio

A measure of a company’s financial leverage planned by split its total liabilities by stockholder’s impartiality. It shows us how to use the assets in company in equity and debt the company. A high debt/equity ratio usually means that a company has been hostile in financing its increase with debt. This can result in volatile earnings as a result of the extra interest cost. The debt is used the finance to increased the company performance in different ways. If the earnings money increases then a better amount of debt cost shareholders is more benefit. The company use debt financing outweighs to return to solve the problem likely bankruptcy which would leave shareholders. The debt/equity ratio also used in the industry which the company operates.

Formula

x 100

Debt/equity ratio of Spectrum Company 2006

(1779/4099) x 100= 43.40%

Debt/equity ratio of Spectrum Company 2076

(3302/4508) x 100= 73.24%

Debt/equity ratio of Spectrum Company 2008

(3911/4940) x 100= 79.17%

Using this ratio it is obviously show that at the present location of company is on way of well geared situation. Its d/e ratio in 2006 was 43.40 percent which was satisfactory but in pending periods there is way variation from 2006 it become 73.24 percent in 2007 and after this year there is no development company to the worse condition and it reach at 79.17 percent which is offensive by the saver or owners of the company. This is normally used the lenders or banks when these are giving loan to company.

Interest coverage

These ratios are used to resolve the problem of company pay interest on dazzling debt. This ratio is working the interest coverage ratio is calculated by dividing firm earnings money before interest and taxes in year and the company interest fixed cost in same year. The company lower ratio is loaded balance fixed cost. The coverage ratio is 1.5or less then it ability to get interest expenses. When coverage ratio less than 1 then the company is not received any interest expenses. If this ratio is more then 7 times it guess safe hand even if its on 3 times is suitable but below of this show worse condition of company.

Formula

Interest coverage ratio of Spectrum Company 2006

2377/142 = 16.74 times

Interest coverage ratio of Spectrum Company 2007

2222/363 = 6.12 times

Interest coverage ratio of Spectrum Company 2008

1832/389 = 4.70 times

Spectrum company at rest in state to pay their all interest on their debts but this ratio decreased year by year and I thing company carry on this presentation further might be in future company will not clever to their interest. Because its interest coverage ratio in 2006 was 16.74 times which is very fine but it decreased in 2007 come on 6.12 times but in current year this ratio arrive at 4.70 times which is suitable because silent able to pay its interest but if consider this declined in future so it thing so in very next year company is not able to their interest.

Current ratio

A liquidity ratio that procedures a company’s ability to pay short-term obligations. Or

A sign of a company’s ability to meet short term debt obligations the higher the ratio the more fluid the company is current ratio is like to current assents divided by current liabilities. If the current assets of a company are more than twice the current liabilities than that company is generally considered to have good short-term financial power.

Formula

It is possible to be said the recent should be around 2 times but it’s depend company to company some company 1.5 times. But if it is under 1 its mean company have not too much missing in to pay their debts.

Current ratio of Spectrum Company 2006

5519/1916 = 2.88 times

Current ratio of Spectrum Company 2007

9138/4307 = 2.12 times

Current ratio of Spectrum Company 2008

8756/4770 = 1.84 times.

Analysis of current asset ratio of Spectrum manufacturing company

In 2006 Spectrum Company recent ratio was 2.88 times its mean at that time company was in burly situation to their debts which was due on that same time periods. But in 2007 it decreased come on 2.12 times which was still suitable. But in current year 2008 its make on 1.84 times which below then 2 it is fear circumstances of a company that they year by year they have not enough assets to pay their debts. Because this depart a bad feeling in market will mot draw to investor that company is able to pay their current liabilities and might be they face difficulties to obtain stack from bank or from lenders.

Advantages of ratio analysis

Ratio analysis key to understand of financial analysis. It is the condition of business concern and performance. It is simply says that comparison two company figure.

Advantages of the ratio analysis

To many groups of people who pays the attention in analysis of financial to solve the problem and better position of the company. They used the ration analysis and solved problem and workout the financial analysis and give a good business in a company.

To workout the success: money people are worked of ratios and give profitability of the business and calculate the profitability ratios. It will help the company manager to know that about capacity of the business concern.

To workout the Solvency: the ratio solved to solvency problem. These ratios show relationships between assets and investment. It will possible to return back the loan of business.

Helpful in analysis of financial statement: the ratio analysis is helpful the outsiders creditors or shareholders. These ratios show the bankers to profitability of the company to pay interest.

Helpful in relative analysis of the performance: with the help of this ratio analysis the company has got more interest as like previous year. The company knows about weak point about their performance.

To simplify the accounting information: in simply accounting ratios are very useful in financial and they briefly summaries the result of complicated computations.

To workout the operating efficiency: the ratio shows the efficiency of the company operation and solved various turnover ratios. All turnover ratios work the performance of the business.

To workout short term financial position: the ratio makes a good business in short time. It gives good result of financial position and removes business bad efforts and makes to improve it.

Helpful for forecasting purposes: accounting ratio indicate the business when it will go wrong turn. With the help of previous years result the make it perfect in future.

Disadvantages

Ratio analysis is completely communicated on the usual office measures for example earnings per share, in service margin ratio. There are some disadvantages which as follow.

Accounting policies

There is some bad effect about using the ratios. One of the accounting police indicate reliable and mirror in the business. The original business particular are important skill to make it good investment decisions. The business gives the profit showy or understand the investors are poor decision in which financial no return output. Then problem in accounting policy. The manager need to change accounting policy and not confuses everyone.

Information problems Ratios are not give good events in all years. So when ratios are used to carefully. Ratios give clues to maintain the performance or financial state. The company performance show the result of information about analysis makes it good or bad.

Out old information in financial statement, the old information of financial statement that facts of accounts are likely at least several months. This might not be proper sign of the company current position.

Analysis of the ratio it is difficult to make simpler about whether a particular ratio is good or bad.

Contrast of performance over time

Price change rise renders given of result over time confusing as financial facts will not be within the same levels of buying power. The project of the company has better its act and location when in fact after adjusting changes it will show the different picture.

Technology changes when the technology changes then the ratio can not show better result. Because ratios are working old method and skills. Ratios are affected the technology and loss the performance of the company.

Changes in office policy the result shows the company adopted accounting police it will give good result in years as false. The problem is the accounting police give the manipulate results through the changes.

Shock of seasons on trading the financial statement the end of year the result of correct evidence may not be same. Company which chooses the best time to produce financial statement is given better result and give good business.

Inter firm comparison The two companies are not the same yet they are competitors in the same market. So we are using ratio and compare one company to other but different financial and business risk.

Agency Theory

A theory about the relationship between a principal and an agent of the principal. A theory explaining the relationship between principals such as a shareholder and agents such as a company’s executives. In this relationship the principal delegates or hires an agent to perform work. The theory attempts to deal with two explicit problems: First that the goals of the principal and means are not in clash agency problem and second that the principal and agent reconcile different tolerances of risk. Agency theory is showing the financial economics that attention between people which is different interests in the same assets. The most important factor of agency theory between

Managers of companies and shareholders

Bond holders and shareholders

Agency theory shows important among other things

Companies give offer to make acquisitions which is bad for shareholders.

Changeable bonds are used which sold with warrants.

Funds agreement matters.

Agency theory is seldom if ever of direct import to group investment decisions. Very important thing is financial economist’s model aspects which show capital markets functions. In agency theory the investors are better understand how to gain benefit. One more important factor between interest of shareholders and debt holders which conflict each other. It is bit risk to high return strategy benefits to shareholders and debt holders.

Implications of Agency Theory

According to me agency theory can be implicated in Spectrum Manufacturing Company on following two issues.

Investment

Investment is use to affection of resources or assets to create financial benefits in the form of income. They make more profit in future. It is use for saving defer. Investment is used in many areas of the economy such as business management and finance. It is not affected for households firms or governments. After analysis an investment involves the choice by a person or an organization such as a income funds or led money in a vehicle or device or asset such as property product stock bond financial matter or the foreign asset denominated in overseas currency that has sure level of risk and provides the possibility of generating returns over a period of time. Shareholder of the company will always think of long term business and the other hand manager goes for the short term investment to show the value every year. For spectrum manufacturing company the conflict can arise on the issue of investment. As company is not very economically sound at this point so share holder would not want any investment.

Risk taking

Risk taking is very important for the company manager because Risk concerns the likely value of one or more outcome of one or more likely events. For spectrum manufacturing company is not a right decision at this point to get any risk. The result of ratio analysis the company has not progress fine in these three years so if management needs to take any uncertain plan on this can grounds an agency problem.

Dividend policy

Dividend is the separation of value to shareholders.

The dividend policy to be created by the company which is the base on tow factor. One is sorted out of permanent dividend policy put into place. The company policies are decided to current position and future financial position. The preferred and direction of the investors are also taken into account.

A company’s dividend policy is the company’s standard do when deciding how big a bonus sum to create. Dividend policy may be frankly stated or investors may believe the dividend payments of the company that had made in past. A dividend police is taken a plan of out share of the company. If company is not defined the dividend police then the shareholders will be finished. The investors are likely to make

The DPS maintain the dividend police which preceding whole year’s level is very low and company has finished the dividend as well possible.

The investors are maintained the payment ratio normally level in the past and they make it completed in the future.

The police of dividend increase to cover as well as it do not drop to low of payments.

Companies do not increase dividends only if they are secure to increase is sustainable. It means the company management increasing dividend and indication of investors to persuade. The dividend police cuts regularly then some permanent drop in a business of company.

Financial by selling bonds bills or notes to person or institutions.

When a firm increases money for working assets or capital expenditures by selling bonds bills or notes to person and institutional shareholders, in arrival for return back the money the persons. Become creditors and receive that the chief and interest on the debt will be repaid. Debt financing is basically money that you use to run your business. Debt finance is two types

Long term Debt Financing usually applies to capital your business is purchasing such as gear buildings land or technology. With long term debt financing the listed repayment of the loan and the likely helpful in life of the asset.

Short Term Debt Financing short term debt finance is needed money for the day of end for operations of the business which is including purchasing list supplies or paying the employees salary. Short term financing is working long term business or short term business loan because refund time is less than one year. In a large business which you run or you have already cash flow and property then you get high safety loan. If however you area sole seller or run a small business you might be optional to use your personal wealth for example your house as security for a loan. For this reason many businesses request support for which they do not have to make direct expenses equity financing.

Equity Financing

Financing by selling common stock or favored stock to investors.

Equity financing define as money acquired from the small or medium business owners themselves or from investors. The stockholders buy the shares in a corporation to create equity financing and the investors who give the fund for business. In small business owners are invest their own money into their businesses that gleaned from bequest saving or even the saving or even the sale assets themselves which include the equity finance which serves it. Equity financing is gift for these kinds of business or investors. They want to expend share and get the risks as well as rewards. Equity finance is work for those investors which are prepared to personal business in large amount of get loan and return to the share ownership in the firms. The searches of loan you get do not choose only one type of financing it is possible to get or loss and both equity financing are all parties involved it. They get all benefit or advantages of equity finance.

Sources of financing a public company

The company would choose the diverse sources of finance depending on the amount required and which it is needed. Finance drive into three categories namely

Traditional sources of finance

Internal resources have traditionally been the chief source of finance for a company. Internal resources could be a company’s resources personal funds and profits that have not been reinvested or distributed among shareholders. Working capital is a short term source of finance and is the money used for a company’s day to day behavior including salaries rent payments for raw resources and electricity bills.

Ownership capital

Ownership capital is the capital owned by the shareholders of a company. A business can raise large funds through an IPO. These funds are usually used for large fixed cost such as new product development growth into a new market and setting up a new plant. The various types of shares are

Ordinary shares: these are also known as equity shares and give the owner the right to share the company’s profits and vote at the firm’s general meetings.

Preference shares: the owners of these shares may be entitled to a fixed share but usually do not have the right to vote.

Companies that are already listed on a stock exchange can opt for a rights issue which seeks additional asset from existing shareholders. They could also opt for late normal shares where in the issuing company is not required to pay dividends until a one date or before the profits reach a certain level. Unquoted companies can also issue and trade their shares in over the counter markets.

Non-ownership capital

Non ownership capital includes funds raised from lenders such as banks and creditors. Companies usually use a fixed amount from a bank at a fixed interest rate and with a fixed repayment schedule. Certain bank accounts offer overdraft services. This is used by companies to meet their short term fund requirements as they usually come at very high interest rate. Factoring enables a company to raise fund using its dazzling invoices. The company typically receives about 85% of the value of the invoice from the factor. This method is more fitting for overcoming short term cash flow issues. Hire purchase allows a company to use an asset without directly paying the complete purchasing price. Trade credit enables a company to obtain products and services from another firm and pay the bill later.

Sources of Finance: Venture Capital

Firms in the early stages of growth can pick for venture capital. This option gives the financing company some ownership as well as power over the way of the project

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Corporate Finance And Formulas Of Ratio Analysis Finance Essay. (2017, Jun 26). Retrieved December 2, 2022 , from
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