Analysis of the capacity to pay, Financial Management

In addition to management quality, an assessment of the financial capacity of a company should also include an evaluation of trends, regulatory environment, basic operating and competitive positions, financial position etc.

Businesses can have a bad year without resulting in financial difficulty. Evaluating trends over a three to five year period will give a clear picture of the direction a firm is heading to. Profitability over time is an excellent indicator of management's efficiency. Raising revenue will not help if the firm cannot control costs. A reduction in expenses may have a minimal impact if revenues do not increase. A host of questions can be answered with a thorough analysis of a company's financial capacity. Ratio results should always be compared to a peer group for an industry comparison to answer questions like: Is the firm collecting faster or slower than the rest of the industry? Is this company more profitable than other companies or just like them?

  1. Industry Analysis: Analyzing industry trends provides important indications of future profitability, asset values, upcoming financing needs, and potential liabilities. For companies that operate in several industries, it is critical that each major business segment is analyzed separately, looking at each Industry from a global perspective. In considering industry trends, analysts look at the vulnerability of the company to economic cycle, globalized commodity pricing, domestic and global competition, barrier to entry, cost factor and the vulnerability to technical changes.

  2. Traditional Ratios: Traditional ratios evaluate the ability of an issuer to meet its obligations and include:

  • Profitability ratios

  • Debt and coverage ratios.

Posted Date: 9/10/2012 9:16:51 AM | Location : United States







Related Discussions:- Analysis of the capacity to pay, Assignment Help, Ask Question on Analysis of the capacity to pay, Get Answer, Expert's Help, Analysis of the capacity to pay Discussions

Write discussion on Analysis of the capacity to pay
Your posts are moderated
Related Questions
List and describe the three career opportunities in the field of finance? Finance has three key career paths: financial markets and institutions, financial management and inves

Determine the Amount of financing required   The last factor determining company's cost of funds is the amount of financing required, where cost of capital increases as the fin

WORKING CAPITAL MANAGEMENT Working capital relates to the capital required for daily operations of a business enterprise.  The requirement for Working Capital is omnipresent fo

Explain Composite Currency Bond Composite currency bonds are denominated in a currency basket, like SDRs or ECUs, in place of a single currency.They are often known as currency

If dividends paid to common stockholders are not legal obligations of a corporation, is the cost of equity zero?  Describe your answer. Even though common stockholders do not com

A Video Rental store has two employees. The Supervisor is paid $2,200 per month. The other employee, Mark is paid $1,200 per month. In addition, Mark is paid a commission of 20 cen

How can a price ceiling make consumers better off?  Under what conditions might it make them worse off? If the supply curve is completely inelastic a price ceiling will raise c

Why do you think the empirical studies as regards factors influencing equity returns mainly showed that domestic factors were more significant than international factors, and, seco

What is the operating leverage effect and what causes it?  What are the potential benefits and negative consequences of high operating leverage? The phrase operating leverage e

Q. What do you signify by Receivables Management? Ans. Receivable Management: - The term receivables refer to debt outstanding to the firm by the customers resulting from sale