Content uploaded by Petrit Shyt Hasanaj
Author content
All content in this area was uploaded by Petrit Shyt Hasanaj on Aug 31, 2022
Content may be subject to copyright.
Humanities and Social Science Research; Vol. 2, No. 2; 2019
ISSN 2576-3024 E-ISSN 2576-3032
https://doi.org/10.30560/hssr.v2n2p17
17 Published by IDEAS SPREAD
Analysis of Financial Statements: The Importance of Financial
Indicators in Enterprise
Petrit Hasanaj
1
& Beke Kuqi
2
1
ILIRIA College, Management, Business and Economics, Pristina, Kosovo
2
University "Haxhi Zeka", Tourism Management, Peja, Kosovo
Correspondence: Petrit Hasanaj, ILIRIA College, Management, Business and Economics, Pristina, Kosovo. E-
mail: petrithasanaj gmail.com
Received: May 20, 2019; Accepted: June 1, 2019; Published: June 19, 2019
Abstract
The main purpose of this study is to determine, forecast and evaluate the best of economic conditions and
company’s performance in the future. The other purpose of this study is to analyze the financial statement and than
give information for financial managers to make through decisions about their business. The financial statement
applies tools, analytical techniques and required methods for business analysis. It is a diagnostic tool for evaluating
financing activities, investment activities and operational activities as well as an assessment tool for management
decisions and other business decisions. The analysis of financial statements, respectively the analysis of the
financial reports are used by managers, shareholders, investors and all other interested parties regarding the
company's state. Managers use financial reports to see the situation in which the company stands and then provide
information to shareholders, to see how reasonable are the investments made in the company. To potential
investors, the analysis of the financial statements of the company is very important, because, first they want to
know the actual state of the company and then decide whether to invest or not.
Keywords: financial analysis, financial reports, decision-making, profitability, liquidity
1. Introduction
There are various number of methods used by accountants and financial analysts to analyze financial state of a
company. The purpose of the financial analysis is to provide information to financial managers and analysts to
make thorough decisions about their business. Assessing financial position and performance of an enterprise is a
skill that every manager needs to have to make the best and right decisions for the company. The analysis of the
financial statements is a method of comparing, judging or valuate situation of particular parts of balance sheet, on
the basis of which important decisions are made. So, financial analysis is an analysis of balance sheets for the past,
present and future of the enterprise. Balance sheet position values separately do not have high analytical
significance, but if we compare them to the values of other balance sheet positions then their comparative value
increases. Financial analysis is a study of the company's financial statements by analyzing the reports. Report
analysis is a tool that easily calculates and interprets reports that are used by investors, creditors, enterprise
executives and others.
1.1 Methodology
In this research a number of qualitative and quantitative elements have been taken for analysis to determine and
analyze the importance of financial indicators in an enterprise. During this study, tools, analytical techniques and
adequate methods were used to analyze the financial statement of Company “X”. The sources of data used in this
research are primary and secondary data. Then, from the data collected, different analyzes were used to come to
the results and to reach a conclusion, indicating that inductive methods were used. Apart from analysis and
induction, in this research it also used the classification method due to certain criterion data categorization. Also,
given the fact that data do not make sense if they are secluded, comparison method was used and the company’s
financial statements were compared for two consecutive years.
1.2 Hypothesis
H
1
- Company has a good financial statement.
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
18 Published by IDEAS SPREAD
2. Analysis
From analyzing the financial statements of the company, we can conclude its financial condition and how it has
operated during the periods for which the analysis is conducted and what are the future trends for that enterprise.
By the use of different liquidity indicators we try to anticipate whether companies can meet their short-term
liabilities using their available current assets. Liquidity ratios have a great benefit of being relatively accurate
regarding their components because on the short-term, there are more realistic data available in the accounting
system than for analysing longterm assets and sources. In case of certain fields of activity, the degree of liquidity
can differ seasonally. For the calculation, we have analysed data of a manufacturing company in the period of
2016 - 2015.
Graphic 1. Summary of liquidity reports
After calculating, analyzing and interpreting the various financial reports of the company, we have come to the
conclusion, that the company has a good liquidity statement, because the company has more short-term assets to
cover the liabilities short-term, which means that there is more working capital. Because, if these indicators are
larger than 1, then it shows that the company has good liquidity status.This means, that this company is able to
pay its current liabilities at any time. Also, we know that current assets are also constituted by customer
requirements and if it happens that customers do not pay their debts, then the company may become insolvent and
this would affect the reputation of the company.
Graphic 2. Summary of revenues and profitability reports
Regarding profitability ratios, there is a better situation in 2016 and it is more effective in using assets to generate
revenues, hence, there is a greater turnover this year as well as greater return on capital. This means, that with the
revenues increased in 2016, are also increased the performance indicators of the company (net profit ratio, from
0.21 to 0.23 in 2016 and gross profit ratio, from 0.38 to 0.40 in 2016).
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
19 Published by IDEAS SPREAD
Graphic 3. Summary of turnover assets ratio
From turnover assets ratio, we can conclude that the company is more effective in 2016 because in this year it was
more likely to collect customer debts (Receivable Accounts, 13.62 times for one year), but it was also more
effective in inventory sales (62.82 times for one year), whilst with regard to payable accounts, the company has
paid more often the debts to suppliers in 2015 (4.38 times for one year), it is good to pay these debts because the
company should not lose these important sources of funding.
Graphic 4. Summary of long-term solvency ratios
Through analysis of financial ratios of long-term solvency, we can conclude that the company is less financed by
debts in 2015, because the smaller the value of these coefficients are indictae that the company is less financed by
debt.
After calculating, analyzing and interpreting the various financial reports of the company, we have come to the
conclusion, that the company has a good financial statement, because the company has a good liquidity statement,
is profitable and is effective in inventory sales. And that leads us to the authentication of the third hypothesis, the
company has a good financial statement.
3. Financial Statements
According to the Accounting Standards, financial statements are a structured financial presentation and
transactions undertaken in an organization. The main financial statements are the means used by the accounting
for the purpose of collecting, processing and presenting economic information. The purpose of financial statements
is to provide information on the position and financial changes as a very important basis for making managerial
decisions (Asllanaj, 2008). The objective of the financial statements is to provide information about the financial
situation, financial performance and changes in an entity's financial position that are usable by a wide range of
users in making their economic decisions (Lewis, & Pendrill, 2004).
Financial statements and reports arising from their study provide information on:
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
20 Published by IDEAS SPREAD
• Assets
• Liabilities
• Equity
• Income and expenditures and
• Cash Flow
Financial statements reflect the cumulative effects of all of management’s past decisions (Helfert, 2001). Financial
statements are the business documents that companies use to report the results of their activities to various user
groups, which can include managers, investors, creditors, and regulatory agencies. In turn, these parties use the
reported information to make a variety of decisions, such as whether to invest in or loan money to the company
(Charles, Walter & Thomas, 2012).
The main financial statements are International Accounting Standards (IAS):
• Income and expenditure statements,
• Balance Sheet,
• Cash Flow Statement,
• Statement of Equity Changes,
• Statement of Explanatory Note.
3.1 Income and Expenditure Statements
This statement shows the financial result of a firm over a period of time (monthly, quarterly or annual). It
summarizes the incomes and expenditures incurred for the creation of such income.
Income - represents the amount of assets generated through business operations.
Expenditure - represent the amount of assets consumed during the business operation, respectively the flows and
obligations occured during the production of goods and services (Asllanaj, 2008). The difference between income
and expenditure represents net income or net profit.
Table 1. Income Statement
3.2 Balance Sheet
The Balance Sheet reports in a summarized form the balances of the assets, capital and liabilities accounts at the
date of its establishment for a specified period of time. The balance sheet denomination comes from the assumption
that between the total assets on one side and the total of capital and liabilities on the other hand, there must be a
2016 2015
Net Sales 233,715 182,795
Cos t o f Sales 140,089 112,258
Gross Margin 93,626 70,537
Operating expenses:
Res earch an d dev elop ment 8,067 6,041
Selling , general an d ad ministrative 14,329 11,993
Operating income 71,230 52,503
Other income/(expense) net 1,285 980
Income before p ro v is ion fo r income t axes 72,515 53,483
Provis io n for in co me t a xes 19,121 13,973
Net income 53,394 39,510
"X" COMPANY
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
21 Published by IDEAS SPREAD
balanced state. Consequently the total assets in the balance sheet must be equal to the total of liabilities and capital
(Asllanaj, 2008).
This equilibrium is expressed through the equation (Xhafa, 2005): Assets = Liabilities + Capital (Equity).
Assets are rights or other access to future economic benefits controlled by an entity as a result of past transactions
or events. Liabilities are obligations of an entity to transfer economic benefits as a result of past transactions or
events (Lewis, & Pendrill, 2004). Capital represents the rights of the owners in the corporate property, so it is a
kind of obligation but to the owners. In fact, demands of the owners of the enterprise's assets are equal to the
amount of the assets which remains after all the liabilities have been deducted (Asllanaj, 2008).
Table 2. Balance Sheet
3.3 Cash Flow Statement
The main purpose of cash flow review is to provide business information about activities that affect cash inflows
and outflows during a fiscal period. In other words, the cash flow statement reports the transactions from which
the cash is generated and the transactions for which the money is used (Asllanaj, 2008).
Years 2016 2015
Curre nt asse ts :
Cash and cash equivalents 21,120 13,844
Short-term marketable securities 20,481 11,233
Ac cou nts rec eiva ble 16,849 17,460
Inv e nto ries 2,349 2,111
Deferred tax assets 5,546 4,318
Vender non-trade receivable 13,494 9,759
Other current assets 9,539 9,806
Total current assets 89,378 68,531
Lon g-te rm marketa ble s ecu rities 164,065 130,162
Property , plant and equipment, n et 22,471 20,624
Good will 5,116 4,616
Acquired intangible assets, net 3,839 4,142
Oth er as sets 5,556 3,764
Total Assets 290,479 231,839
Current liabilities
Accounts payanble 35,490 30,196
Accrued expenses 25,181 18,453
Defe rred rev enue 8,940 8,491
Commercial paper 8,499 6,308
Current portion of long-term debt 2,500 0
Total current liabilities 80,610 63,448
Deferred revenue, non current 3,624 3,031
Long-term debt 53,463 28,987
Othe r no n-c urre nt liab ilitie s 33,427 24, 826
Total liabilities 171,124 120,292
Share holders ' e quity
Comon stock 27,416 23,313
Ret ained e arnin gs 92,284 87,152
Accumulated other comprehensive income (345) 1,082
Total shareholders' equity 119,355 111,547
Total liabilities and shareholders ' equity 290,479 231,839
Liabilities and Shareholders' Equity
Assets
"X" COMPANY
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
22 Published by IDEAS SPREAD
Cash flow statement methods (Society of Certified Accountants And Auditors In Kosovo (SCAAK)) (2008):
Direct method - shows cash collection from customers, interest and dividends collected, other cash inflows, money
paid to suppliers and employees, paid interests, paid taxes and other operating fees
Indirect method - starts with net income and is adjusted to deferred items, ascertained, non-monetary items such
as depreciation and amortization and non-operating items such as profits or losses on the sale of assets.
Money flows and capital movements are divided based on activities (Lewis, & Pendrill, 2004):
• Operational activity
• Investment activity
• Financing activity.
Operational activities - are the principal revenue-producing activities of the enterprise and other activities that are
not investing or financing activities.
Investment activities – are the acquisition and disposal of long-term assets and other investments not included in
cash equivalents.
Financing activities – are activities that result in changes in the size and composition of the equity capital and
borrowings of the enterprise.
3.4 Statement of Equity Changes
This statement shows the changes occurred to the size of the owner's equity over a certain period of time from the
change of his interests or from the activity of business units, which explains changes in capital and reserves over
a year or (Assets – Liabilities = Equity) (Asllanaj, 2008).
4. Main Financial Analysis Indicators
The main indicators of financial analysis are the following ratios (Helfert, 2001):
Liquidity Ratio
Profitability Ratio
Assets turnover ratio
Ratio of long-term solvency (debt)
4.1 The Importance of Liquidity and its Analysis
As it is known, a company's liquidity refers to its ability to settle short-term liabilities when they mature. So
liquidity is the ability to convert activities into cash or make money in another way (eg through financing) (Mayo,
2012).
Liquidity analysis through working capital – working capital has been consistently considered as one of the most
important and significant indicators in the liquidity analysis of an enterprise. From creditor’s point of view,
working capital is always from the first indicators to be considered. This is because the creditor always seeks to
find and read "safety" in the financial statements. He is interested in liquidity because it "protects" him from an
unwanted situation of lack of cash (Shuli & Perri, 2010).
Working capital is calculated as the difference between short-term assets and short-term liabilities
Working capital = short term assets – short term liabilities
2015: Working capital = 68,531 – 63,448 = 5,083
2016: Working capital = 89,378 – 80,610 = 8,768
Liquidity Ratios are
4.1.1 Current Ratio
Shows a direct proportion between short term assets and short term liabilities. Through this, it is measured the
ability of a firm to pay short-term liabilities at the maturity date (expiry date of payment) (Mayo, 2012).
= ℎ
ℎ
2015: = ,
, =1.08
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
23 Published by IDEAS SPREAD
2016: = ,
, =1.10 times
This ratio shows that the company in 2015, for every 1 euro short-term obligation has 1.08 euro short-term assets
to cover them. In 2016 the company has 1.10 euro short-term assets, for every 1 euro short-term obligation. The
most liquid is in 2016.
4.1.2 Rapid Ratio
An even more stringent test, although again on a static basis, is the acid test or quick ratio, which is calculated
using only a portion of current assets—cash, marketable securities, and accounts receivable—which are then
related to current liabilities (Helfert, 2001).
= ℎ −
ℎ
2015: = ,,
, =1.04
2016: = ,∋,
, = 1.08
This ratio shows that even though the company is deducting stocks as assets that can not be converted into cash
very fast, it is still quite liquid and compared to the previous year, in 2016 the company is more liquid, where for
every 1 euro short-term liability has 1.08 euros of current assets to cover them.
4.2 Profitability Ratios
The fundamental purpose of every business is to make profit. These reports show how reasonable decisions are
that the organization has made for investments. Profitability reports express exactly what the organization wins
over its sales, assets or capital (Asllanaj, 2008).
4.2.1 Rate of Return over Total Assets
Shows a direct proportion between net profit and total assets. The return on total assets is a ratio that measures the
effectiveness of using total assets to generate net profit (Mayo, 2012).
ROA=
2015: ROA=,
, =0.17 %
2016: ROA=,
, =0.18 %
From the calculation of this ratio we see that the company has the greatest rate of return on assets in 2016, it is
natural that the higher the rate of return is, it is more favorable to the company.
4.2.2 Rate of Return over Share Capital
Measures the profit made from investments of regular shareholders in the company's assets. In other words, the
rate of return on share capital is the rate of return from regular (ordinary) shares invested by the owners of the
enterprise (Asllanaj, 2008).
ℎ =
2015: ℎ =,
, =0.35 %
2016: ℎ =,
, = 0.44 %
From the calculation of this ratio we notice that the company has greater return on capital in 2016, it is also
important for the company to have this ratio higher than the return on assets, as this indicates that the enterprise is
in the successful years of business.
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
24 Published by IDEAS SPREAD
4.2.3 Net Sales Ratio over Net Assets (Equity)
Shows a direct proportion between net sales and net assets. This report measures the profitability of the enterprise
on the basis of the efficiency of using net assets in the generation of revenues from sales (Asllanaj, 2008).
=
2015: = ,
,,/ = 1.55
2016: = ,
,,/ = 2.02
From calculation of this ratio we notice that in 2016 the company has exploited assets better and managed to
generate more income this year.
4.2.4 Net Profit Ratio
Shows the amount of profit made for each € 1 of sales. In other words, this ratio measures the percentage of each
euro of sales that remains after deduction of expenditures, including interest expenditures and tax expenditures.
=
2015: = ,
, = 0.21 %
2016: = ,
, =0.23 %
From the calculation of this ratio we notice that, from revenues, the company generated higher percentage of profit
in 2016 compared to the previous year.
4.2.5 Gross Profit Ratio
Shows the percentage gained from sales after commodities reached the customer (Xhafa, 2005).
=
2015: =
= ,
, = 0.38 38 %
2016: =
= ,
, = 0.40 40 %
This shows that the company in 2016 has a higher gross profit margin than in other years, this report also shows
how much the company earns on its products.
4.3 Assets Turnover Ratios
Indicators of assets turnover provide the key information on the efficiency of usage and control of certain aspects
of current business assets such as: inventories (reserves), current accounts and credit accounts. The ability to sell
inventory of goods and collection of cash from buyers undoubtedly comprises the succesful business foundation
of any commercial business (Asllanaj, 2008). The main indicators of assets utilization are:
4.3.1 Turnover Ratio of Receivable Accounts
This ratio measures the ability of the entity to collect debts from buyers for sales with due date for payment. So,
this ratio shows how many times Receivabe Accounts has been converted into cash within a certain period of time
(Mustafa, I. (2005).
=
2015: = ,
, =11.96
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
25 Published by IDEAS SPREAD
2016: = ,
, = 13.62
From the calculation of this ratio we notice that the company was most effective in collecting cash from buyers in
2016, doing this 13.62 times during the year, whilst in 2015 it did 11.96 times during the year.
4.3.2 Ratio of Unreceivable Sales Days
This indicator provides information about how many days is the deadline for collecting sales with due date for
payment. In other words, through the ratio of unreceivable sales days it is indicated the number of days needed to
be collected from receivable accounts (Asllanaj, 2008).
= 365
2015: =
. = 30.52
2016: =
. = 26.80
From this report we notice that the company has more often received debts from buyers, and this has done every
26.80 days in 2016 whilst in 2015 every 30.52 days.
4.3.3 Inventory (Stocks) Turnover Ratio
This ratio measures the ability of the entity to sell the inventory or the speed of stock sales within a specified period
of time. This ratio practicly shows how many times a year the firm has sold the average level of its inventory
(Asllanaj, 2008).
=
2015: = ,
,. = 57.94
2016: = ,
, =62.82
From the calculation of this report we notice that the company has most frequently sold stocks in 2016, whilst the
turnover stocks was 62.82 times during the year.
4.3.4 Inventory (Stocks) Sales Days Ratio
This ratio measures efficiency in inventory management, simply this ratio shows the number of days needed to
sell inventory within a year.
2012: =
2015: =
. =6.29
2016: =
. =5.81
Calculating per day, we see that the company has sold stocks every 5.81 days in 2016 and every 6.29 days in 2015.
4.3.5 Turnover Ratio of Payable Accounts
This ratio measures the efficiency of payment management to suppliers, simply this ratio shows the deadline or
the period of liabilities towards suppliers. For an ideal firm it would be that the payment period to suppliers to be
equal with the period of collection of sales from buyers (Asllanaj, 2008).
Purchases = Cost of goods sold t + Inventory at the end – Inventory at first
2012: =
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
26 Published by IDEAS SPREAD
2015: = ,
,. = 4.38
2016: = ,
, = 4.27
From calculation of this ratio we notice that the company has paid debts to the supplier more often in 2015with
4.38 times during the year. It is better to pay these debts because the company should not lose these important
sources of funding.
4.4 Ratio of Long-Term Solvency
Solvency reports measure the enterprise's ability to pay long-term debts on their maturity date. While liquidity
refers to the enterprise's ability to pay short-term debt, solvency means the enterprise's ability to maintain financial
stability in meeting long-term liabilities. In the solvency analysis the starting point is the capital structure of an
enterprise. The capital structure constitutes share capital and long-term debt capital. Significant component in the
capital structure is the financial leverage. Financial leverage represents the amount of debt participation in the
financing of the enterprise (Asllanaj, 2008).
4.4.1 Debt Ratio over Total Assets
Measures the ability of an entity to cover long-term liabilities, this indicator is an information for creditors on the
security of the given debt return. Practically shows debt participation in an enterprise financing (Shuli & Perri,
2010).
=
2015: = ,
, = 0.52 52%
2016: = ,
, = 0.58 58%
For creditors it is desirable that the debt ratio to be o report the debt as small as possible and vice versa, for the
shareholders it is favorable the debt ratio in the greatest value, under the condition that the profitability of total
assets to be higher than the cost of debt capital.
4.4.2 Debt Ratio over Equity
A more refined version of the debt proportion analysis involves the ratio of longterm debt to capitalization (total
invested capital). The latter is again defined as the sum of the long-term claims against the business, both debt and
owners’ equity, but doesn’t include short-term (current) liabilities. This total also corresponds to net assets, unless
some adjustments were made, such as ignoring deferred taxes (Helfert, 2001).
=
ℎ
2015: = ,
, = 1.07 107 %
2016: = ,
, = 1.43 147%
When values of this ratio are high, it means that the interest rates to be paid towards creditors will also be higher.
Therefore, this report shows the extent of financing the enterprise through debts.
5. Conclusions
The analysis of the financial statements is a very important process, even necessary for making right decisions.
Information obtained from financial analysis, together with accounting, are the basis for making decisions, both
internally and externally. From the analysis of financial statements, we can ascertain its financial condition and
how it has operated during the periods for which the analysis is conducted and what are future trends in that
enterprise. These reports are also used to give information to shareholders on how reasonable are investments
made in the company because they are interested in making profit from investments made. These reportscare also
hssr.ideasspread.org Humanities and Social Science Research Vol. 2, No. 2; 2019
27 Published by IDEAS SPREAD
used by potential investors who first want to know how the company is performing and then decide whether to
invest or not.
After calculating, analyzing and interpreting the various financial reports of the company, we have come to the
conclusion that in terms of liquidity, the state of the company is better in 2016, because this year the company has
more short-term assets to cover short-term liabilities which means that there is more working capital.
Regarding profitability ratios, there is a better situation in 2016 and it is more effective in using assets to generate
revenues, hence, there is a greater turnover this year as well as greater return on capital.
From turnover assets ratio can be seen that the company is more effective in 2016 because in this year it was more
likely to collect customer debts (Receivable Accounts), but it was also more effective in inventory sales, whilest
with regard to payable accounts the company has paid more often the debts to suppliers in 2015, it is good to pay
these debts because the company should not lose these important sources of funding
Through analysis of financial ratios of long-term solvency, we see that the company is less financed by debts in
2015, because the smaller the value of these coefficients are indictae that the company is less financed by debt.
References
Asllanaj, R. R. (2008). Financial Accounting, University of Pristina, Pristina, 50-68, 581-586.
Charles, H., Walter, H., & Thomas, W. (2012). Financial Accounting, 9th Edition, 2.
Helfert, E. A. (2001). financial analysis-tools and techniques, McGraw-Hill, United States, 107-129. Retrieved
from http://alqashi.com/book/book17.pdf
International Accounting Standards (IAS), 24-63.
Lewis, R., & Pendrill, D. (2004). Advanced Financial Accounting, seventh edition, 4-5, 96, 154, 547. Retrieved
from http://ek-sk.com/files/Kontabiliteti_financiar_avancuar.pdf
Mayo, H. (2012). Principles of Finance, UET Press, Tirana, 251-276.
Mustafa, I. (2005). Financial Management, Pristina, 102-103.
Shuli, I., & Perri, Rr. (2010). Analysis of Financial Statements, albPAPER, Tirana, 275-338.
Society of Certified Accountants And Auditors In Kosovo (SCAAK) (2008). Financial Accounting, Pristina, 464-
465.
Xhafa, H. (2005). Analysis of Financial Statements, third edition, Pegi, Tirana, 52-225.
Copyrights
Copyright for this article is retained by the author(s), with first publication rights granted to the journal.
This is an open-access article distributed under the terms and conditions of the Creative Commons Attribution
license (http://creativecommons.org/licenses/by/4.0/).
