5.0 References 8 Essay Example

Table of Content

Particulars Page No.

1.0 Introduction 2

2.0 Calculation of Ratios 3

3.0 Impact and Discussion of Ratios 5

4.0 Conclusion 7

5.0 References 8

  1. Introduction

Ratios play a significant role in controlling and analyzing the financial performance of an organization and help to evaluate the cause of lower returns and find measures to ensure long term sustainable development of business. This report looks to evaluate and analyze the financial statement of Balansheen Trading for three years. The analysis makes a complete discussion on the ratios calculated along with likely causes and possible remedies to ensure that the business achieve better and higher returns in future years.

Finally a conclusion is provided to ensure proper and complete understanding of the entire topic under study.

  1. Calculation of Ratios

The ratio’s of Balansheen Trading has been calculated as under.

Particulars

Current Ratio

Current Ratio= Current Assets/Current Liablities

(42000+60000)/

(35000+18000)=

(63000+104000)/

(84000+41500)=

(66000+98000)/

(72000+20500)=

Quick Ratio

Quick Ratio=

Total Current Assets- Inventory- Prepaid expenses/ Total Current Liablities

(102000-60000)/

(35000+18000)

(167000-104000)/ (84000+41500)=

(164000-98000)/

(72000+20500)

Receivables Turnover

Receivables Turnover= Net credit sales/ Average Accounts Receivable

=832000/{(42000+40000)/2}

= 20.29 times

=365 days/20.29

=17.98 days

=895000/{(63000+42000)/2}

= 17.05 times

=365 days/17.05

21.41 days

=950000{(66000+63000)/2}

=14.73 times

=365/14.73

= 24.78 days

Inventory Turnover Ratio

Inventory Turnover Ratio= Cost of Goods sold/Average Inventory

=540000/{(60000+54000)/2}

= 9.47 times

=365 days/9.47

=38.54 days

=670000/{(104000+60000)/2}

=8.17 times

=365days/8.17

=44.68 days

=760000/{(98000

104000)/2}

= 7.52 times

=365 days/7.52

48.54 days

Asset Turnover Ratio

Asset Turnover Ratio=

Net Sales/ Average Total Assets

=832000/{(193000+177000)/2}

=895000/{(267000+177000)/2}

=950000/{(267000+264000)/2}

Return on Total Assets

Return on Total Assets= Net Income/ Total Assets

=125700/177000

=0.71 times

54400/267000

=0.20 times

40200/264000

=0.15 times

Return on Owner’s Equity

Return on Owner’s Equity= Net Income/ Average Shareholder’s Equity

=125700/(120000+100000/2)

=54400/(100000+110000)/2

=40200/(110000+130000)

  1. Impact and Discussion of Ratio’s

This section of the report provides a complete discussion on the trends, implications, possible causes and possible remedies of the ratios calculated above.

  • Current Ratio: Current Ratio is a liquidity ratio which highlights the extent to which current liabilities are covered by current assets of the business. The current ratio of Balansheen Trading for all three years is higher than 1 which is good indicator of its short term obligations being fully covered by its current assets and further provide additional cushion against any future unforeseeable contingencies. Furthermore the ratio indicates a more conservative approach of Balansheen towards its working capital management and should look to set its current ratios per industry standard to ensure higher returns and more churning of its working capital. A decrease in 2014 is mainly on account of higher bank overdraft which has been rightly managed in 2015.

  • Quick Ratio: The Quick ratio of Balansheen Trading shows similar trend to its current ratio. There is a slight decrease of quick ratio in the year 2014 which has been efficiently managed in 2015. However the firm should aim towards a quick ratio of 1:1 or higher than that so as to ensure that all its short obligations are met with considerable quick liquidity. Currently the firm relies more on its inventories and other assets to meet its short term liabilities which is an area of concern and short look towards more cash or cash equivalents to ensure a quick ratio of 1:1 in future years.

  • Receivables Turnover Ratio: This ratio is an efficiency ratio which measures which measures the firm’s ability to efficiently collect its receivables (Hoggett, Edwards & Medlin, 2009). The credit term of Balansheen Trading is 14 days however its receivable collection period is rising from 15 days approximately in 2013 to 25 days approximately in 215 which is an area of great concern as it implies that the credit sales are less likely to be collected and hence increase the working capital requirements. A possible remedy to the same would be effective management to ensure fast and quick collection of its receivables.

  • Inventory Turnover Ratio: This is another efficiency ratio which highlights how effectively the inventory of the business is managed and sale is generated from it. The inventory turnover ratio of Balansheen Trading is a great area of concern as the inventory turnover level is much higher than the ideal level of 30 days and has risen significantly from approximately 38 days in 2013 to 48 days in 2015 indicating poor management and stock piling which has an adverse effect on both its creditors and banks to provide collateral loans. Furthermore the working capital as a result of the same shall rise significantly due to higher stock piling. Possible remedies could be management looking towards cost pool techniques or overhead allocations or setting standard cost to being inventory turnover under control.

  • Asset Turnover Ratio: This is again an efficiency ratio which highlights how successfully a firm is able to generate revenue by use of its assets effectively. Balansheen Trading has a diminishing asset turnover ratio which indicates poor growth for the firm which is mainly on account of poor inventory management and lax collection method which has automatically leads to poor use of its assets in generating cash. Improving upon its collection system and better flow of inventory shall help in maintaining its asset turnover to achieve industry standards.

  • Return on Total Assets Ratio: This ratio is a profitability ratio which indicates how effectively management is able to utilize its assets to generate earning. The Return on Total Assets Ratio for Balansheen Trading has significantly declined from 0.71 times in 2013 to 0.15 times in 2015 which is again an area of great concern and arise doubts on the going concern theory of the firm. The management should immediately look to eliminate the non-productive assets from the firm and ensure better cash generating techniques to ensure no default on associated interest expenses on its debt assets purchased earlier.

  • Return on Owner’s Equity: This is a profitability ratio which measures the firm’s profitability by highlighting how much profit has the business generated by its shareholder’s investments. Balansheen Trading has a poor growth in terms of its profits generated which has an adverse effect on its shareholder’s equity with declining returns to its shareholder’s and losing interest of its investor s to switch to competitors business. Possible remedy could be better profit generation and better inventory and asset management to lower the working capital and boost up returns for its investors.

  1. Conclusion

The report highlights the ratio calculations and their interpretations along with possible remedies for Balansheen Trading. The firm has been doing good to meet its short term obligations by ensuring a higher liquidity ratio however the profitability and efficiency ratios of the firm is an area of concern. The firm has been experiencing lower profits with higher inventory turnover which leads to higher stock piling and increase in its working capital requirements with lower profits. An effective management system with strict management control is the need of the hour for Balnasheen Trading to ensure that higher returns are generated and attract more investors for sustainable business growth and development.

  1. References

Hoggett, Edwards & Medlin. (2009). Financial Accounting, 7th Edition, 18 (4), 303-319, Wiley, Brisbane.