Assignment Essay Example

3Ratio Analysis

  1. Current Ratio= current assets/current liabilities

=302/273

  1. Quick ratio= current assets- inventories and prepayments/ current liabilities

= 302-120/273

  1. inventory turnover= cost of goods sold/inventories

= 1160/120

  1. A/C Receivables Turnover= average accounts receivables/ sales*365

= (90+57)/2 /2900*365

=9.25 days

  1. Fixed Asset turnover ratio= sales/ net fixed assets

= 2900/156

  1. Total Asset turnover= sales/ total assets

= 2900/458

  1. debt ratio= total liabilities/ total assets

= 313/ 419

  1. debt-to-equity ratio= total liabilities/total stockholders’ equity + liabilities

= 286/458

  1. Times-Interest Earned= operating costs/ EBIT/ interest expense

= 1271/26

  1. gross profit margin= gross profit/sales *100%

= 1740/2900

=0.6*100%, 60%

  1. Operating Profit Margin= operating profit/sales *100%

=1271 /2900*100%

  1. net profit margin= net profit/sales*1000%

= 903/2900*100%

  1. Return on Total Assets(ROA)= net income/Total assets*100%

=903/458*100%

= 197.16%

  1. Return on Equity= net income/ total equity*100%

= 903/172*100%

  1. Earnings Per Share= net income- less preference share dividends/ average no of shares

=903-45/500

  1. Price/ Earnings Ratio= End of year stock price/EPS

= 5.50/1.72

Question 2

The financial analysis of organisations’ performances possesses a significant importance in the overall world economy. Taking time to conduct evaluation of financial reports that are prepared by a company at hand is deemed to be a critical tool for which to determine the financial performance where in fact, the process of analysing these reports assists financial managers in coming up with both strengths and weaknesses and thus, work towards finding solutions to these challenges (Oberholzer, 2012). Research indicates that the adoption of financial ratios allows for easier and concise of analyzing financial health of a company given that it provides accurate evaluation information that can later be used for working out solutions to the challenges posited (Lusardi & Mitchell, 2014).

The use of liquidity ratios helps in determining the financial capacity of a company to meet its short term commitments through measuring its overall capabilities whenever these obligations fall due (Lusardi & Mitchell, 2014). It helps to measure an organisation’s capacity to cover for its current liabilities as well as in determining on whether or not it has sufficient cash resources needed for meeting its short term obligations.

Profitability ratios like the ROA and ROE help to establish the degree of efficiency for which a company can assume its overall investment decisions and therefore measure the underlying company management efficiency in attaining profits that would later be used for paying off dividends (Lusardi & Mitchell, 2014).

Debt ratios are used to determine the extent for which a company can depend on others to access money resources that are needed for meeting its overall finance obligations and needs as such (Lusardi & Mitchell, 2014). Activity ratios are used for measuring the efficiency of a company’s overall management in distributing its underlying financial resources in a positive way for most of its assets and thus, ascertaining the capacity of these asset-base to generate more products and services.

Question 3

Financial ratio analysis greatly constitutes aspects of comparisons between different firms within the same industry using a given set of industry averages. There are significant number comparative ratios that can be sourced from a number of sources that include; ValueLine, Robert Morris Associates and so on depending with the industry at hand. Benchmarking is the most known form of comparing rations of a given company with that of its group of similar companies within an industry (Lusardi & Mitchell, 2014). It allows companies to establish certainly the position for which it stands in regards to its overall rivals. It is important to note that management engage in comparative ratio analysis for purposes of ensuring to assist in the control and therefore, improve the overall operations of their companies in relation to its closest rivals and attract huge investor base(Lusardi & Mitchell, 2014). Markedly, market stock analysts engage in comparative ratio analysis for the purpose of establishing the level of a company’s efficiency, risk and growth potentials for the future period. Following this line of reasoning, it can thus be said that the use of industry averages in comparative financial analysis does not entail a challenging target for high-degree of company’s performance mechanism.

References

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44.

Oberholzer, M. (2012). The relative importance of financial ratios in creating shareholders’ wealth. South African Journal of Economic and Management Sciences, 15(4), 416-428.