Financial Analysis a firm’s performance
Financial Analysis
Introduction
In the evaluation of a firm’s performance, no measures can be used in isolation. In this text, I compare the effectiveness and reliability of using financial measures as opposed to non financial measures in the evaluation of a firm’s performance.
Effectiveness and reliability of financial measures
Financial measures include but are not limited to the various ratios i.e. current ratio, quick ratio return on equity etc. On the other hand non financial measures of a firm’s performance include but are not limited to the quality of a firm’s management, future expectations of the firm’s performance based on the industry performance or other metrics etc. In the evaluation of a company’s performance, it is prudent to have a look at the company’s earning capacity (Helfert 2001). Now, this cannot be simply established by using non financial measures. This can best be done by applying or computing return on equity (ROI) which is simply computed by dividing the net earnings by the shareholders equity. It shows how well the shareholders investments are performing as compared to the ROE of other companies. The performance of a firm is also best established by looking at the efficiency of a company (Bragg 2007). This can only be done by using financial measures of efficiency i.e. the return on assets ratio which measures how fixed assets are being utilized by management to generate net profit.
Conclusion
It is important to note that whereas financial measures are vital as well as effective and reliable for purposes of evaluating a company’s performance; they should not be used in isolation but should be instead used had in hand with the various non-financial measures.
References
Bragg, S.M. (2007). Financial analysis: a controller’s guide. John Wiley and Sons
Helfert, E.A. (2001). Financial analysis: tools and techniques: a guide for managers. McGraw-Hill Professional
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