Analysis of objective factors

Gathering information. Surveys conducted among credit insurers that while evaluating the credit worthiness they rely mainly on information gathered from annual financial statements and sales figures. Most modern financial institutions (namely banks and insurance companies) use their own standardized computer programs to support their analyses, which focus on the development of companies: (earning capacity, return on sales, cash flow, asset structure, capital resources; liquidity).

A computer-aided process is widely used whereby key figures are used to try to separate healthy companies from those at risk of insolvency.

Limitations of analyses based on annual results

In order to gain an in-depth knowledge of a company's financial situation, it is important, but not sufficient, to study its most recent balance sheets and income statements in detail. Changes of the data since the previous balance sheet can indicate an improving financial situation for a company or its deterioration. Liquidity, profit, current and future profit potential (e.g. competitive advantages, level of innovation) should be taken into account.

Analysis of subjective factors - ethics and morals

In practice, analysts consider it very important to examine a company's working practices, i.e. its management. All assessments of the company's future performance assume that it is managed adequately and rationally.

Human factor. The human and personal criteria are important because it is managerial team who leads the company towards success - or failure. The characteristics of a company's management will determine whether that company has the potential for success or not.

Good reputation.Company's reputation leads us to seek information from third parties on the morals and capabilities of its management. At the time of the credit assessment, it is extremely important to know what competitors, customers and suppliers think of a company, because the behavior of its partners will go some way to determining its future development and, consequently, its ability to pay when a loan falls due.

Conclusion. The key to risk assessment

A company's financial strength is only one element, although a very important one, of risk analysis. Financial metrics are the deciding factor. Moral and ethical creditworthiness is difficult to measure and requires very good analytical skills.

35. Financial manager’s functions at the company.

The financial manager is an important position within the structure of any firm. His role is "to create value from the firm's capital budgeting, financing, and net working-capital activities". Financial managers are responsible for the preparation of financial reports, execute cash management strategies, and direct a corporation's investment activities. Increasingly, this job has also included detailing and implementing a corporation's long-range goals.

"Financial managementThe planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization.

There are four essential aspects of financial management:

- Financial management is a distinct area of business management - i.e. financial manager has a key role in overall business management;

- Prudent or rational use of capital resources -proper allocation and utilization of funds;

- Careful selection of the source of capital - determining the debt equity ratio and designing a proper capital structure for the corporate;

- Goal achievement - ensuring the achievement of business objectives.

Financial manager’s functions:

Recurring

· Financial planning including assessing the funds requirement

· Identifying and sourcing funds

· Allocation of funds and income

· Controlling the use or utilization of funds towards achieving the primary goal of profit/wealth maximization.

Episodic

· The preparation of financial plan at the time of promotion of the business enterprise

· Financial readjustment during liquidity crisis

· Valuation of enterprise at the time of merger or reorganization

· Such other episodic activities of great financial implications.

7 functions of financial management:

Financial planning, Forecasting, Organization function, Regulation, Coordination, Stimulation, Control

36. Corporate financial statements: purpose, types, users. Financial statements analysis.

Why do companies provide financial accounting statements? They have a variety of stakeholders: shareholders, bondholders, bankers, creditors, suppliers, employees and management, for example. All these stakeholders are interested in monitoring how well their interests are being served in the given company.

The balance sheetis a summary of the assets, liabilities, and equity of a business at a particular point in time - usually the end of the firm’s fiscal year.

Assets are the resources of the business enterprise, such as plant and equipment that are used to generate future benefits.

Liabilities are obligations of the business. They represent commitments to creditors in the form of future cash outflows. When a firm borrows, say, by issuing a long-term bond, it becomes obligated to pay interest and principal on this bond as promised.

Equity also called shareholders’ equity or stockholders’equity, reflects ownership. The equity of a firm represents the part of its value that is not owed to creditors and therefore is left over for the owners. In the most basic accounting terms, equity is the difference between what the firm owns—its assets—and what it owes its creditors—its liabilities.

An income statement is a summary of the revenues and expenses of a business over a period of time, usually either one month, three months, or one year. This statement is also referred to as the profit and loss statement. It shows the results of the firm’s operating and financing decisions during that time.

The operating decisions of the company - those that apply to production and marketing - generate sales or revenues and incur the cost of goods sold (also referred to as the cost of sales or the cost of products sold). The difference between sales and cost of goods sold is gross profit. Operating decisions also result in administrative and general expenses, such as advertising fees and office salaries. Deducting these expenses from gross profit leaves operating profit, which is also referred to as earnings before interest and taxes (EBIT), operating income, or operating earnings. When interest expenses and taxes, which are both influenced by financing decisions, are subtracted from EBIT, the result is net income.

The statement of cash flows is a summary over a period of time of a firm’s cash flows from operating, investment, and financing activities.

The firm’s statement of cash flows lists separately its operating cash flows, investing cash flows, and financing cash flows. By analyzing these individual flows, current and potential owners and creditors can examine such aspects of the business as:

· The source of financing for business operations, whether through internally generated funds or external sources of funds.

· The ability of the company to meet debt obligations (interest and principal payments).

· The ability of the company to finance expansion through operating cash flow.

· The ability of the company to pay dividends to shareholders.

· The flexibility the business has in financing its operations.

Additional information about equity can be found in the statement of shareholders’ equity, which is a breakdown of the amounts and changes in equity accounts.

To analyze financial statements analysts use financial ratios.

· As a coverage ratio. A coverage ratio expresses firm’s ability to “cover” or meet a particular financial obligation. Any obligation of the firm may act as a denominator in the given kind of ratios while the amount of funds available to satisfy the given obligation expresses the numerator.

· As a return ratio. The given ratio indicates the net benefit received by a firm from a particular investment of resources.

· As a turnover ratio. This ratio is a measure of how much a firm gets out of its assets.

Coefficient of liquidity	Coefficients of financial stability Analysis of a Company's Use of Debt	Operating efficiency ratios
Current liquidity ratio: Current assets / Current liabilities	1. Equity ratio Owner's Equity / Total Assets	1. Total asset turnover Net Sales / Average Total Assets
Quick liquidity ratio: (Cash & Cash equivalents + S.T. Investments + Accounts receivable) / Currents liabilities	2. Debt ratio Total Debt/ Total Assets	2. Fixed-Asset Turnover Net Sales / Average Fixed Assets
Critical liquidity ratio: Cash + S.T. Investments / Current liabilities	3. Financial leverage ratio Total debt/ Shareholders equity	3.Equity Turnover Net Sales / Average Total Equity

Return on investment ratios
1. Return on Assets (ROA)	EBIT / Average Total Assets
2. Return on Total Equity (ROE)	Net Income / Average Total Equity
Operating profitability ratios
1. Gross profit margin	Gross Profit / Net Sales
2. OperatingProfitMargin	Operating Income / Net Sales
5. NetMargin (ProfitMargin)	Net Income / Sales