Appraisal Techniques & Balance Sheet Effects
A project's financial viability is determined using some common appraisal techniques, and similarly some of the effects investments have on the balance sheet are highlighted in the balance sheet effects.
It is worth remembering that no method of financial appraisal is perfect. A simple method with which the organisation is familiar may be more useful than a more sophisticated but unfamiliar one. The following sections outline the main criteria used in financial appraisal and highlight their advantages/disadvantages.
Balance sheet effects
All commercial sector organisations have to consider the ‘shape’ of their balance sheet. In the case of public companies, city analysts will assess the company’s performance and issue reports to existing shareholders and prospective investors. Naturally, the company will wish these reports to be as favourable as possible. In addition, lending institutions that have lent the company money will monitor its financial performance.
The main performance benchmarks are ratio analyses. However, the value of a single ratio is extremely limited, and it is usually more important to determine trends and relationships than to rely on absolute values.
Common ratios with the greatest influence on the choice of a financing method for packaged CHP are liquidity, gearing and return on capital employed (ROCE). However, their relevance will vary with the type and nature of the organisation concerned – in the case of public sector bodies, for instance, they are likely to be of limited interest.