Financial analysis involves creating specialized analyses to answer specific business questions and forecast possible future financial scenarios. The goal of financial analysis is to shape business strategy through reliable, factual insights rather than intuition.
By providing detailed insights into companies' financial data, financial analysis offers managers the tools to gain valuable knowledge of key trends and take action to improve business performance.
LIST OF PERFORMING FINANCIAL INDICATORS
Calculation:
Current ratio = Current assets / Short-term liabilities
Meaning
This ratio indicates a company's ability to use its current assets, such as cash, inventory, or accounts receivable, to pay off its short-term liabilities. A higher ratio suggests the company is more likely to repay all its debts.
If the current ratio is less than 1, it indicates that the company is in a negative financial situation and is likely to be unable to repay its debts when they mature.
However, this does not mean the company will go bankrupt because there are many ways to raise additional capital.
On the other hand, if this ratio is too high, it's not a good sign either, because it indicates that the business is not using its assets efficiently.
Calculation:
Quick Ratio = (Cash and cash equivalents + Accounts receivable + Short-term investments) / (Short-term liabilities)
Explain the meaning
The quick ratio indicates whether a company has sufficient current assets to pay off its current liabilities without having to sell inventory.
This ratio more accurately reflects the current ratio. A company with a quick ratio less than 1 is unlikely to be able to repay its short-term debts and should be carefully considered. Furthermore, if this ratio is significantly lower than the current ratio, it means the company's short-term assets are overly reliant on inventory. Retail businesses are typical examples of this.
Calculation
Accounts receivable turnover = Annual net sales / Average accounts receivable
Where: Average accounts receivable = (Remaining accounts receivable from the previous year's report and accounts receivable for the current year)/2
Explain the meaning
This is an indicator showing the effectiveness of the credit policy that a business applies to its customers.
A higher turnover ratio indicates that customers are paying off their debts more quickly. However, it's necessary to compare it with other businesses in the same industry, because if the ratio is too high, the business may lose customers as they may switch to competitors offering longer credit terms.
How to calculate the Inventory Turnover Ratio
Inventory turnover ratio = Cost of goods sold / Average inventory
Where: Average inventory = (Inventory in the previous year's report + current year's inventory)/2
Explain the meaning of the Inventory Turnover Ratio.
This index reflects how effectively a company manages its inventory.
A higher inventory turnover ratio indicates that the business is selling goods quickly and that inventory is not accumulating excessively within the company.
Essentially, a high inventory turnover ratio indicates low risk for the business; however, an excessively high ratio is also not good because it means there isn't enough inventory in stock. If market demand suddenly increases, the business is very likely to lose customers and market share to competitors.
For effective management, businesses need to maintain appropriate inventory levels to meet customer demand.
INVESTMENT FINANCIAL INDICATORS (COMPANY VALUATION)
ROE – the return on common equity – is the most important ratio for shareholders, measuring the profitability of each dollar of common shareholder capital.
Formula: ROE = Net profit attributable to common shareholders / Common stock value
This index is an accurate measure of how much profit is generated from each dollar of invested and accumulated capital. Investors often analyze this ratio to compare it with other stocks in the same industry, using it as a reference when deciding which company's stock to buy.
A higher ROE indicates that the company's management is using shareholders' capital efficiently, so this indicator is often an important criterion for considering investment opportunities in a company's stock.
The criteria for determining a reasonable return on equity (ROE) will vary across different industries and business sectors. For example, in the Vietnamese stock market, the average ROE for industrial service businesses is around 8,5%, construction and building materials suppliers have an ROE of 11,6%, while retail businesses have a significantly higher ROE of 25,6%. This difference depends on the level of capital intensity used in business operations to generate profit.
A general principle when evaluating businesses is to look for companies with a return on equity (ROE) equal to or higher than the industry average. For example, company A has maintained a stable ROE of 18% over the past few years compared to the industry average of 15%. Investors might conclude that A's management has used shareholders' capital effectively to generate above-average returns.
When calculating this ratio, investors can evaluate it from the following specific angles:
– If ROE is less than or equal to the bank loan interest rate, then if the company has bank loans equivalent to or higher than its shareholders' equity, the profits generated will only be used to pay the bank loan interest.
– If ROE is higher than the bank loan interest rate, it's necessary to assess whether the company has borrowed from banks and fully exploited its competitive advantages in the market to determine whether the company can increase its ROE in the future.
The P/E (Price to Earning ratio) is an indicator that assesses the relationship between a stock's market price (Price) and its earnings per share (EPS).
This index represents the price you are willing to pay for one dollar of profit earned from a stock. In other words, how much you are willing to pay for a company's stock based on its profits (earnings).
Formula to calculate P/E index:
P/E = Market price of the stock / Earnings per share
For example: Suppose the market price of stock X as of December 31, 2020, was 21.000 VND, and the company's earnings per share (EPS) for the year was 3.000 VND. Therefore, the P/E ratio of stock X is 7.
EPS (Earnings Per Share) is a financial indicator used to measure the average return per share of a company over a specific period. It shows the amount of after-tax profit of the company distributed to each outstanding share on the stock market.
EPS (Earnings Per Share) is one of the most important indicators in assessing the value of a company and its stock on the stock market. It provides information about the profit a company generates per share and helps investors evaluate the company's future profitability.
Calculating EPS depends on several factors such as net profit after tax, the number of outstanding shares, and other investment fees. Companies with high EPS are more likely to attract investor interest and may influence their stock price on the stock market.
EPS calculation formula
EPS (Earnings Per Share) is calculated by dividing a company's after-tax profit by the number of shares outstanding on the stock market.
The specific formula is as follows:
EPS = (Net profit – Preferred dividends) / Number of outstanding shares
In which:
Net profit after tax: This is the amount of profit a company earns after deducting all expenses and income taxes.
Preferred dividends: These are payments made to preferred shareholders before earnings per common share are calculated.
Number of outstanding shares: This is the total number of shares of a company that are being distributed on the stock market.
For example:
Assuming company A has a net profit after tax of VND 100 billion, no preferred dividends, and 100 million shares outstanding, the company's EPS would be:
EPS = (100 billion VND – 0) / 100 million shares = 1000 VND/share
A higher EPS (Earnings Per Share) indicates better profitability for the company, and therefore a higher potential for stock price appreciation in the stock market. However, EPS should also be considered alongside other factors such as stock price and other financial indicators to assess the health and growth potential of a company.