Financial Statement-Nur Vebrianti

By: Nur Vebrianti

3AD3/361 10 19

Financial Statement Analysis

RETURN ON EQUITY (ROE)

A.   Definition Financial Statement Analysis

The process of reviewing and evaluating a company's financial statements (such as the balance sheet or profit and loss statement), thereby gaining an understanding of the financial health of the company and enabling more effective decision making. Financial statements record financial data; however, this information must be evaluated through financial statement analysis to become more useful to investors, shareholders, managers and other interested parties.

B.    OBJECTIVE OF FINANCIAL STATEMENT ANALYSIS:

1.     Assessment of past Performance

Past performance is a good indicator of future performance. Investors or creditors are interested in the trend of past sales, cost of good sold, operating expenses, net income, cash flows and return on investment. These trends offer a means for judging management's past performance and are possible indicators of future performance.

2.     Assesment of current Position

Financial statement analysis shows the current position of the firm in terms of the types of assets owned by a business firm and the different liabilities due against the enterprise.

3.     Prediction of profitability and growth prospects

Financial statement analysis helps in assessing and predicting the earning prospects and growth rates in earning which are used by investors while comparing investment alternatives and other users in judging earning potential of business enterprise.

4.     Prediction of bankrupt and failure

Financial statement analysis is an important tool in assessing and predicting bankruptcy andprobability of business failure.

5.     Assessment of the operational efficiency

Financial statement analysis helps to assess the operational efficiency of the management of a company. The actual performance of the firm which are revealed in the financial statements can be compared with some standards set earlier and the deviation of any between standards and actual performance can be used as the indicator of efficiency of the management.

C.     TYPES OF ANALYSIS:

1.      Liquidity Ratios

Liquidity is the ability of a business to pay its current liabilities using its current assets. Information about liquidity of a company is relevant to its creditors, employees, banks, etc. current ratio, quick ratio, cash ratioand cash conversion cycle are key measures of liquidity.

2.      Solvency Ratios

Solvency is a measure of the long-term financial viability of a business which means its ability to pay off its long-term obligations such as bank loans, bonds payable, etc.. Information about solvency is critical for banks, employees, owners, bond holders, institutional investors, government, etc.. Key solvency ratios are debt to equity ratio, debt to capital ratio, debt to assets ratio, times interest earned ratio, fixed charge coverage ratio, etc.

3.      Profitability Ratios

Profitability is the ability of a business to earn profit for its owners. While liquidity ratios and solvency ratios are relationships that explain the financial position of a business profitability ratios are relationships that explain the financial performance of a business. Key profitability ratios include net profit margin, gross profit margin, operating profit margin, return on assets, return on capital, return on equity, etc.

4.      Activity ratios

Activity ratios explain the level of efficiency of a business. Key activity ratios include inventory turnover, days sales in inventory, accounts receivable turnover, days sales in receivables, etc.

Performance ratios include cash flows to revenue ratio, cash flows per share ratio, cash return on assets, etc. and they aim at determining the quality of earnings.

5.      Coverage Ratios

Coverage ratios are supplementary to solvency and liquidity ratios and measure the risk inherent in lending to the business in long-term. They include debt coverage ratio, interest coverage ratio (also known as times interest earned), reinvestment ratio, etc.

D.    RETURN ON EQUITY (ROE)

1.      Definition

Return on equity is a measure and the income available to shareholders and the company (both ordinary shareholders and preferred shareholders) on the capital they invest in the company.

2.      Purpose

to determine the estimates and predictions of the most likely about the condition and performance of the company in the future

3.      PROFITABILITY  RATIO ANALYSIS Of  the COMPANY

The formula for ROE is:

ROE = Net Income/Shareholders' Equity

—  Data net income, EBIT, equity, and total assets PT Semen Gresik at the end of 2006 and 2007 as presented in the following table:

                                                                                           (in billions of dollars)

KETERANGAN	2006	2007
Net Income	1.295,52	1.775,41
Ebit	1.779,38	2.396,85
Equity	5.499,61	6.627,26
Total Assets	7.496,42	8.515,23

ROE = Net Income/Shareholders' Equity

 

From the calculation, it can be seen Return On Equity in 2006 by 23,56%, and amounting to 36.79% in 2007, This means that the ability of their own capital to generate a net profit of 23,56% in 2009, and amounted to 36,79% in 2007.

E.     CONCLUSIONS

From these results it can be shown that the company in managing its own capital in the net profit has increased from 2006 to 2007.

F.     SUGGESTIONS

Thus, seen during the 2 years the company is able to efficiently manage their capital seen from the increase in the ability of their own capital to generate profits. Therefore the company must keep increasing the volume of sales / services and fixed income market expanding nation.