Accounting Ratios and Monitoring Business Performance Essay
Accounting ratios and monitoring business performance
Ratio analysis can be used as a management tool to monitor and improve the performance of HSBC as well as being used by those outside of the organisation such as bank regulators, potential shareholders and suppliers to look at the performance of HSBC and compare it with other similar organisations.
Information used for comparison must be accurate - otherwise the results will be misleading.
There are four main methods of ratio analysis - liquidity, solvency, efficiency and profitability. If ratios of companies are to be compared it is important that the companies are in the same industry. It would be appropriate to compare HSBC ratios with other the ratios of other …show more content…
Management at HSBC should be ensuring that they comply with the Liquidity Coverage Ratio at all times in order to comply with banking regulations and also to make sure that they do not run into cash flow difficulties.
Solvency ratios measure the ability of a company to pay its long term debt and the interest on that debt. Solvency ratios are of interest to long-term creditors and shareholders as these groups are interested in the long-term health and survival of the business.
The management of HSBC should be ensuring that the solvency ratios indicate that the health of the company is good and that all debts can be serviced and that the ratios will not cause shareholders to be concerned.
In other words, solvency ratios have to prove that business firms can service their debt or pay the interest on their debt as well as pay the principal when the debt matures.
One ration that the management of HSBC should be keeping a close eye on is the Total Debt/Total Assets ratio. This measures the amount of HSBC’s asset base that is financed using debt. A ratio of 50% for example would mean that half of HSBC;’s assets are financed using debt and the other half by equity.
For management at HSBC to know if HSBC’s Total Debt/Total Assets ratio is high or low it will need to be compared with the