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Module 1: Informações contábeis

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Estabilidade de Longo Prazo

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Accounting - Topics - Understanding and using accounting information -
Discussing long term stability

Discussing long term stability

Selection of the key ratios is again important. It is easy to use a
multitude of 'gearing' ratios, however, only one is necessary. Most
people favour liabilities to total assets as a measure of gearing.

The references are not consistent in their definition of ratio items. For
instance, some define the rate of return ratio using "owner's equity"
whilst others use 'average owner's equity'. Either is acceptable providing
you are consistent in the application of these measures. Where relevant you
should use an 'average' figure.

Two other possible ratios to use are:

* debt ratio = Interest bearing debt/total assets

* interest coverage ratio = Net cash flow from operations +
interest/interest expense

It is important that you graph the ratios stated above along with
liabilities: total assets. The movement of these ratios must be explained
and, if provided, compared with a benchmark.

By referring to the financial reports you should attempt to explain why
changes have occurred.

Before condemning a business in respect of it's long term stability
check the nature of the non-current assets. If these assets have been
acquired some time ago and are shown at historical cost then it may be
possible that they are considerably understated in value, which means the
gearing situation is not as bad as it appears.

On the other hand a business, which has a reasonable gearing, may still
fail if it loses a major account or suffers the failure of a major
customer/debtor.

An area you may wish to pursue in your report concerns items which are
certainly not measurable but vital in performance evaluation. One such
example is the quality of the management of the business you are
evaluating.

The advice you provide to management may be non-financial such as
providing better staff training, improved customer relations and use of the
internet. You may also suggest that the business widen or contract
operations.

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