Task 11 (D2)
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 banks but not for example a construction company.
Liquidity ratios
These ratios should be used on a daily basis by management to monitor performance and manage cash flow risks.
There are three types of liquidity ratio: * Current ratio - current assets divided by current liabilities. This assesses whether you have sufficient assets to cover your liabilities. A ratio of two for example shows you have twice as many current assets as current liabilities. * Quick or acid-test ratio - current assets (excluding inventory) divided by current liabilities. A ratio of one shows liquidity levels are high - an indication of solid financial health. * Defensive interval - liquid assets divided by daily operating expenses. This measures how long your business could survive without cash coming in. This should be between 30 and 90 days.
A ratio that is specific to banks and therefore HSBC is the Liquidity Coverage Ratio (LCR)
The Liquidity coverage ratio is designed to ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions. Banks are required to hold an amount of highly-liquid