Financial stability depends on the ability of a business organization to make a profit, and raise the value of the capital investment, while also managing both long-term and short-term liabilities. Evaluation of Holiday Snacks Limited’s business performance is based on a variety of approaches to financial analysis. The preference of a certain method depends on the intended use, time, and level of algorithm expansion. The analysis of financial ratios and financial statements are among the most appropriate indicators of financial performance. Managers, investors, creditors, and business partners utilize such financial decision-support information to evaluate Holiday Snacks Limited to determine if the firm is financially stable and able to grow sustainably.
Financial ratios are suitable for financial analysis due to various factors including their simplicity and extra information. The majority of companies such as Wall Street investment firms, and bank loan personnel use financial ratio analysis to understand their current and potential financial health (Myšková and Hájek, 2017, p. 97). Financial ratios enable Holiday Snacks Limited to analyze the progress of the firm’s financial health. These tools also make it possible for cross-sectional analysis, and comparative analysis. Furthermore, the tools can help Holiday Snacks Limited as they act as indicators of productivity. Chief financial officers and business and credit analysts can use this ratio to determine if the firm is profitable or can finance its overall operations and growth, its expenditure, and how it performs on the stock market.
A variety of financial tools is essential in gaining an in-depth insight into the financial health of a business enterprise. Common size ratios, liquidity ratios, efficiency ratios, and solvency ratios are the most widely used tools that can show the performance of Holiday Snack Limited. A common size ratio that includes the income account statement as a percentage of the sales would help show the progress of the business operations (Lassala, Apetree, and Sapena, 2017, p. 4). The solvency ratio would determine the stability of the business and capability to service debts, such as loans, and hence, an indicator of the health and viability of the company.
Holiday Snack Limited can use financial ratio analysis in two different techniques. The management may perform ratio analysis to evaluate the current performance of the firm relative to the past periods ranging from the previous quarter to several years before. The analysis may help the organization identify issues that require intervention measures. Holiday Snack Limited can utilize the ratios to compare its performance to that of the rivals and other competitors in the food industry.
Financial statements give financial information that a business organization requires to evaluate its performance. The statements provide a clear picture of the operating results of the company. Holiday Snack Limited can use the statement to show the assets, liabilities, and equity of a particular financial year. The income statement of the business would help to reveal the sales, expenses, and profits or losses and, hence, help the management to evaluate the company’s previous income performance (Dulleck, 2019, p. 13). The income statement also evaluates the uncertainty of future cash flows. The cash flow statement shows the exchange of money between the firm and external partners and business entities for a particular period. The management can then determine the ability of the company to pay for expenses and purchase assets.
Statement of shareholders’ equity is also an important element of financial health of a firm. It is a section of the balance sheet which indicates variations in several equity elements, such as retained earnings during a certain period. Holiday Snack Limited can employ this tool to determine the accumulation of investment returns for the existing equity shareholders. An increase in retained earnings would imply a stable growth in the business’s shareholders’ equity.
Reference List
Dulleck, U. (2019) Financial decisions and financial regulation: three concepts of performance based regulation. Munich: Munich Society for the Promotion of Economic Research.
Lassala, C., Apetrei, A. and Sapena, J. (2017) ‘Sustainability matter and financial performance of companies’, Sustainability, 9(9), pp. 1-16.
Myšková, R. and Hájek, P. (2017) ‘Comprehensive assessment of firm financial performance using financial ratios and linguistic analysis of annual reports’, Journal of International Studies, 10(4), pp. 96-108.