Question

Calculating and interpreting financial ratios is the bare minimum requirement in analyzing any company’s performance, and estimating its future performance. Beyond the ratio analysis calculations what else would insightful managers or investors do to feel confident in their assessments of an organization’s financial performance?

Answer 1

Financial Ratio analysis is a quantitative way of assessing a company's performance. However there are a lot of other factors which should be taken into consideration while analyzing the organization's financial performance.

1) It should be duly noted about whether expenses i.e. Management salaries, Board Salaries and other employee salaries are as per norms or not. Any type of discrepancy should be immediately dealt with.
2) The company's profit margins as per various products should be considered. This would make a big impact in understanding whether the business is volume driven or margin driven. This can impact sales.
3) If it is a conglomerate you should understand how money is flowing between sister concerns. i.e. how the flow of money is happening, This is because there are a lot of cases where there are cases of misappropriation of funds or transfer of funds from performing units to non-performing units. This would hamper future performance of the performing units as the cash flow generated is not being reinvested in the same company.
4) The company's relationship with the creditors should be evaluated. This is because if credit freezes the company is left in the lurch suddenly. Thus this is very important to keep continuation in the flow of the business.
5) The company's management should keep a hawk eye on ways to minimize costs as much as possible.
6) Machines and equipment should be such that there should not be a large amount of depreciation. This is because the salvage value is then sustained and the company can reinstall fresh equipment with minimal costing.