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Methods of the Financial Statement Analysis

April 3rd, 2016 10:43 pm

The variety of methods can be used to evaluate the current position and effectiveness of the company, based on the financial statement data. Most important are ratio analysis, vertical and horizontal analysis, year-to-year change analysis, competitors comparison, etc. These methods are used to discover the turning points, which are specific events and trends that signal changes that can influence future financial performance of the company.

Ratio analysis is an efficient method of the firm’s performance evaluation, making it possible to approach the company’s financial condition from different angles. Depending on the needs of an analyst, financial ratios may be a tool of measuring the company’s liquidity, financial sustainability, activity or profitability (these are the main existing ratio categories). Applying ratio analysis to the company’s financial statements can be a base for different conclusions on the business health, as well as for the prediction of possible future development trends. It is useful for a wide variety of users: from the company’s owners, searching for the ways of improving their business efficiency, to the existing and potential investors, considering the ratio analysis as their risk management tool.

Liquidity ratios provide the measurement of the company’s ability to meet its current obligations. Objects of the liquidity ratio analysis mainly are the company’s current assets and current liabilities. The ability to pay the short-term debt is an important indicator of the financial stability of a business. The main ratios included to this group are cash ratio, quick ratio, current ratio and others.

To measure the financial sustainability of a firm, debt ratio analysis is being applied. It indicates the ability of a firm to carry its debt in the long run. Normally greater debt means greater bankruptcy risk; that’s why it is important to understand if the company has enough sources of finance to meet its long-term obligations. The main ratios of this category are the debt ratio, times interest earned, debt to equity ratio, etc.

Activity ratios measure the efficiency of the company’s asset utilization. It indicates the level of the company’s asset management efficiency. If the company’s use of its inventories, fixed assets and accounts receivable is effective enough, the activity ratios will reflect the positive trends. This group of ratios includes total asset turnover, accounts receivable turnover, cash conversion cycle and others.

One of the most important measures of the company’s performance is a group of profitability ratios. These ratios measure the ability of the company to earn profit, which is the key goal of the business. Most commonly, profitability ratios are being divided into margins (showing the firm’s ability to transform money from sales into profits) and returns (measuring the ability of the company to generate returns for the stockholders). Key ratios of this category are net profit margin, return on assets and others.

All the data needed for the above-mentioned ratios computation can be obtained from the company’s financial main statements (balance sheet, income statement, etc.). Normally, even if a set of the same ratios calculated for the different periods doesn’t provide enough information for a precise analysis, it still will reflect a positive or negative trend in the firm’s development. To avoid misleading conclusions, it is necessary to compare all the computed ratios with main competitors and with industry averages.

Vertical and horizontal analysis provide insight into the structure and dynamics of the company’s assets, sources of financial resources and financial results. Vertical analysis shows the weight of different elements and helps to understand if they are well balanced. For example, the high share of trade receivables means that clients are distracting part of capital from the operational process. This can lead to the rise of cost of the attraction of additional financial resources. Vertical analysis of the equity and liabilities helps to understand if creditors are well protected. Given a high share of equity, one can assure that in case of insolvency providers of financial resources will receive their money back. Vertical analysis of financial results shows how important different revenues and expenses are for the company and what their role in a profit earning process is.

Horizontal analysis presents the change of the same element value over the period under review. As a part of the horizontal analysis, year-to-year change analysis helps to predict future performance based on the financial information of prior years. Considering industry and macroeconomic trends, an analytic can assess financial risks of the company. For example, year-to-year shortening of working capital can lead to the liquidity loss. A strong trend of losing equity means that company may become a bankrupt.

It’s important to notice that financial conditions differ among industries. For example, the automation software industry is on its rise, while gas-extracting companies have problems related to the low price of fuel on the global market. That’s why the comparison with its major competitors is needed. Companies are working in the same conditions, so it helps better to understand management effectiveness. Better performance on the same market means higher financial effectiveness. An analytic can also compare indicators of the studied company with industry averages.

Overall findings of the company’s financial analysis should reflect the result of every used method. An analytic can emphasize financial strengths and weaknesses and give its opinion on the prospects of the company. Depending on the financial statement analysis goal, one can answer following questions:

1. How effective is a company?
2. How strong is its current position?
3. What is a value of the net assets?
4. How well are the creditors protected?
5. Are there any threats to the company’s financial sustainability?
6. Are there any changes that will influence future performance?

Becoming a Commercial Real Estate Broker

January 16th, 2016 4:21 am

The Commercial Real Estate Industry touches virtually every aspect of business in the United States and most of the free world. Very few companies can grow without acquiring more land or additional office space, patients can’t use the services of a hospital unless it’s constructed and consumers can’t shop at a Walmart without the development of Real Property.

Commercial Real Estate encompasses all aspects of sales, leasing, management, investment in or improvement of retail property, investment property, farmland, businesses, industries, medical facilities and dozens of other types of property. Our job in the industry is to assist in the lease, management or sales of property, and to advise our clients of their best courses of action when deciding how to invest in or improve real property or a commercial asset.

You will work directly with industry leaders, community leaders, government officials, lawyers, zoning officers, accountants, mortgage companies, banks, title companies, appraisers, utility companies and everyone in between to put together sales or develop property to its full potential for a client. While you can’t make decisions for our clients, you can assist them in making better informed decisions, and you can help our clients to understand what the highest and best use may be for a particular property, or what type of investment vehicle might be best for your client.

You will work with property owners who may want to sell a property, lease a property, have a property managed or determine what use might be better for the property than the current use. You will work with users of properties to find the best location for their business or investment, to determine if it’s better for the user to lease a property or purchase and to understand the tax implications of their decisions. Additionally, You will work with investors to determine which real estate venture might be their best investment to meet their particular goals and needs.

Commercial real estate agents and brokers work with individuals, investors, organizations and corporations to develop property to its highest potential. Their careers include many specializations. Some commercial associates specialize in particular types of property, such as office property, develop-able farmland or even amusement parks. Other commercial associates specialize in particular forms of consulting work for Real Estate Investment Trusts (REITs), insurance companies or utility companies. Still others work in specialized areas such as resort management or assist government agencies with the redevelopment of industrial sites or reclamation of land.

Commercial Real Estate is an exciting and rewarding field of study and can lead to dozens of different career opportunities. Whether someone is starting their first small business, developing a parcel of land, or considering an investment in real estate rather than an investment in a mutual fund or money market, the understanding of commercial real estate is fundamental to their decisions.

To begin your career in this sector of the industry you’ll need to understand exactly what you’re selling, how it is priced, how it is financed and what legal documents must be used to convey the sale or lease. In other words, what are the responsibilities of a commercial real estate broker. Let’s take a look at the key elements necessary to be successful in commercial real estate.

You will need to examine the diverse forms that commercial property takes and the important terms used by those in the field to explain and understand a type of property. Next you will need to explore the different methods of determining value in the eyes of property users, investors, real estate professionals and appraisers. You will also need to learn how commercial real estate can be financed and how it may be leased. There is also a need to perform an examination of the legal documents including listing contracts, sales agreements and lease contracts.

Your responsibilities as a commercial real estate professional include:

For Sellers or Property Owners:

  • Hold or Sell Analysis – Analyze the market to determine what course of action is best for a property owner. Is it better to hold onto the property longer, or would an owner be better suited selling the commercial property? This analysis may include projections of cash flows, and determination of internal rate of return.
  • Property Management – Assist the owner by leasing and / or managing the day to day situations that arise in any real estate investment. Management may include suggestions of how to create more value in the property. 3 story multi-tenant Office Building with central common atrium.
  • Property Leasing – Finding tenants for a property owner’s commercial real estate. This may include advice on creating a niche for the property, or ways to attract more solid long term tenants.
  • Property Sale or Marketing – Determining the best course of action in order to maximize the sales price on a property and find the best possible buyer.

For Buyers, Tenants or Investors:

  • Investment Analysis – Provide an investor or buyer with comparisons of various properties or types of property and their cash flows or investment returns in order to determine what situation may be best for the investor or buyer.
  • Site Selection – Assist the investor or buyer with locating a site that meets the client’s needs. Assist with demographic data to support the client’s business or investment goals. An agent may also be required to assist with determining the site’s suitability based on zoning regulations, environmental conditions and financing considerations.
  • Cash Flow Analysis / Return on Investment – What kind of return can an investor expect on a particular real estate investment? Agents provide projections of potential future income and analysis of potential return on the property.

For both Sellers / Owners and Buyers / Investors:

  • Property or Business Valuations – Any property owner wants to know what their property is worth to a buyer and what the highest sales price or lease price is possible in the current market. Buyers or Investors want to know what a fair price may be for the same property or business, and will want to know what the best investment may be at this point in time.
  • Feasibility Studies – Conduct a market study with the help of Real Estate Appraisers and engineers to determine the highest and best use of a property, or forecast a project’s likelihood of success.
  • Exchange Opportunities – Tax-deferral benefits may make it worthwhile to exchange the property, or use a 1031 deferred exchange.

Commercial Real Estate Professionals can be rewarded for their quality work and adherence to ethical standards. Learning the fundamental methods and tools used are critical to the success of both the professional and their clients.

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