Measuring Changes in Financial Through Ration Analysis

Abstract

The paper presents a critical examination of the performance of the traditional ratios, followed by a description of the development and testing of a model which measurers changes in the financial health of the companies. With the number of liquidations increasing, it is important to try to establish some method of measuring changes that takes place in the financial health of companies. Certainly, over the term, the success of share investment in companies depends to a large extent organization investments, which is return on investments. However, lenders, bankers, creditors and employees, must also be interested in the above factors for the health of the company in its ability to meet its obligations which is determined in part by how profitable it is and how well it is managed. Generally speaking, measures of liquidity involve comparisons of a company's relatively immediate liabilities with those assets available to meet them. The ratio is measured to assess the cover available to meet the existing current liabilities these being assumed to require repayment in the relatively near future. It is obvious that all such ratios are liable to window-dressing and valuation problem which could distort them and lead to misleading portrayal of liquidity. Findings show that 35% of tested companies revealed the key ratio producing a 20% return or more in the second year from failure when using profit/net operating assets while only 2% of companies showed a 20% or more return when using total asset. The model gave indications on early warnings and identifications of ratio score movements. Amongst others, it was recommended that the audit functions and the propriety of model can alleviate many of ratio-related potential problems, but the analysis must understand the trailities of the data and, particularly, the problems of comparison over time and between companies. Further, the use of total assets is strongly recommended as the key profitability ratio gives misleading results to jailing companies when net operating assets are used as the denominator