FINANCIAL REPORT ANALYSIS ISMAIL (46110048)

Time Interest earned ratio

By :ismail3B D4 (41610048)

1.      Financial Statement Analysis

Financial statement analysis (or financial analysis) the process of understanding the risk and profitability of a firm (business, sub-business or project) through analysis of reported financial information, by using different accounting tools and techniques.Analyzes financial statements doing by internal users (management) and external users(Investors, creditors, regulatory agenciesstock market analysts and auditors). Internal users do analyzes financial statements for Planning, evaluating and controlling company operations and external users do it forassessing past performance and current financial position and making predictions about the future profitability and solvency of the company as well as evaluating the effectiveness of management

2.      Methods of Financial Statement Analysis

a.       Horizontal Analysis

Using comparative financial statements to calculate dollar or percentage changes in a financial statement item from one period to the next.

b.      Vertical Analysis

For a single financial statement, each item is expressed as a percentage of a significant total.

c.       Common-Size Statements

Financial statements that show only percentages and no absolute dollar amounts

d.      Trend Percentages

Show changes over time in given financial statement items (can help evaluate financial information of several years)

e.       Ratio Analysis

Expression of logical relationships between items in a financial statement of a single period.

3.      Finansial report

Financial reporting (financial statement) is presenting financial data of a company's operating performance, position and funds flow for an accounting period. They typically include basic financial statements, accompanied by a management discussion and analysis:

1. Statement of financial position: also referred to as a balance sheet, reports on a company's assets, liabilities, and ownership equity at a given point in time.
2. Statement of comprehensive income: reports on a company's income, expenses, and profits over a period of time. A profit and loss statement provides information on the operation of the enterprise. These include sales and the various expenses incurred during the processing state.
3. Statement of cash flows: reports on a company's cash flow activities, particularly its operating, investing and financing activities.

4.      Time interestearned ratio

Times interest earned ratio shows how many times the interest expenses are covered by the net operating income (income before interest and tax) of the company. It is a long-term solvency ratio that measures the ability of a company to pay its interest charges as they become due. It is computed by dividing the income before interest and tax by interest expenses.

5.      Significance and Interpretation

Times interest earned ratio is very important from the creditors view point. A high ratio ensures a periodical interest income for lenders. The companies with weak ratio may have to face difficulties in raising funds for their operations.Generally, a ratio of 2 or higher is considered adequate to protect the creditors’ interest in the firm. A ratio of less than 1 means the company is likely to have problems in paying interest on its borrowings.A very high times interest ratio may be the result of the fact that the company is unnecessarily careful about its debts and is not taking full advantage of the debt facilities. Example:for december 31, 2010 Alex company have net income (before tax) $20,000 and its fixed interest charges on long-term borrowings are $5,000

Solution:

Interpretation: The times interest earned ratio of Alex company is 5,0 times. It means that the interest expenses of the company are 5,0 times covered by its net operating income (income before interest and tax).