Company financial ratio evaluation report finance essay

The aim of this report is to analyse the personal ratios of the Super Cheap Auto Group Ltd and ARB Corporation Ltd from 2008-2009. This would help to give an improved knowledge of both company’s financial health and performance. This statement has analysed the fiscal ratios of both companies and found out that both firms are profitable. ARB Company is more efficient than Super Cheap Vehicle Group. All its efficiency ratios suggest that the business is successful in its functions. The weakest results originated from its inventory turnover which remained regular over the two years period. Super Cheap Auto Group needs to boost on its inventory and debtors turnover so as to achieve optimum efficiency. Steadiness ratios advise that ARB Company is more stable than Super Cheap Auto Group. The report as gives recommendations which will help both companies to perform better.

Introduction:

The effectiveness and interpretation of economic ratios are the most frequently used methods to analyse a company’s personal performance. This report would examine the economical info provided in the economical reports of two businesses, namely; Super Cheap Car Group Ltd and ARB Corporation Ltd. The statement would analyse some of the info reported by both firms in their financial statements. In the end of this report, readers would be able to tell a variety of reasons for having the above companies. For instance, it would be practical to tell if whether the companies are operating in excess debt or inventory and what corrective actions could be put in place to be able to keep the business moving in the proper direction. These monetary ratios would help to throw extra light on some salient business issues such as if the customers are paying their debts promptly, or if the company’s operating expenses are a great deal to make it generate optimum profits. Ratio calculations can also help to make financial analysts to better understand whether the company is making the very best make use of its assets. It’s possible for a business to either over or under utilise its possessions in its quest to maximise profits. Ratio analysis can guide a company to know whether it’s making good utilization of its assets so when it is not the case; the results of the calculations can help the monetary analyst to recommend control to take the correct corrective measure. As a way to ensure that the very best decision is made, businesses do a comparison of their ratios to the general industry ratios published by the industry in which they operate. A business can compare its specific ratios to the common ratios compiled for sector to understand whether it is relocating the right or wrong direction.

Profitability Ratios:

Profitability ratios are used to gauge the ability of a organization to yield returns on the capital invested into the venture. The fact that a company is making revenue is not adequate to classify it as a successful business (Epstein & Jermakowicz, 2007). This is because some businesses make much less profit than they might have produced if the factors of development were combined in different ways. Profitability ratios are not merely there to notify whether a business is making income or not (Wild, 2007). In addition to the above; profitability ratios tell if a business is as profitable as it should be. A rise in profitability ratios is a possible sign for just about any business (Wild, 2007). The profitability ratios of both Super Cheap Vehicle Group Ltd and ARB Company Ltd are all positive. They ratios recommend that the firms are making profits and so are worth the purchase of investors. The desk (Appendix A good) depicts the performance of the various profitability ratios. Positive implies that the profitability ratios had been good. Both businesses had positive outcomes on all the ratios performed. Below can be an explanation about the various ratios and how to calculate them.

Gross Profit Margin:

The gross profit margin can enable the supervision of a organization to evaluate the ability of the business enterprise to yield returns on purchase at the gross revenue level. This ratio addresses three issues such as pricing, development and inventory. This ratio could be calculated utilizing the method below (Epstein & Jermakowicz, 2007):-

Gross Profit

Total Sales

Net PROFIT PERCENTAGE:

The net profit margin can quickly enable a business to know how much net profit it generates from each dollar received in product sales revenue. It is an indicator that supervision can use to assess whether it has well managed its operating bills in order to ensure that the business enterprise generates the best possible returns on expenditure. This ratio as well indicates whether the organisation is making the right volume of sales that may enable it to meet with set costs while making some affordable profits. Net profit percentage can be calculated by using the formula the following:-

Net Profit

Total Sales

Return on Assets:

This ratio how to write an autobiography essay and impress readers can be used by management to measure the level of efficiency with that your company makes usage of its assets to make profits. This ratio is utilized to measure a company’s level of efficiency in the utilization of its assets.

Net Profit Before Taxes

Total Assets

Efficiency Ratios:

Efficiency has to do with the evaluation of the various ways in which companies manage their possessions. Financial analysts are always interested in evaluating the value of a company’s assets along with the how the company manages these resources. There are numerous ratios that works extremely well by financial analysts to evaluate the level of efficiency within a business (Wild, 2007). The proficiency ratios analysed in the desk titled Appendix A depicts that both businesses are efficiently run even though there is dependence on some minor improvements that can only go to improve on the level of performance (Williams, 2008). ARB must increase on inventory turnover as it had a set trend from 2008-2009. Creditors’ turnover was likewise negative as creditors appeared to mount more pressure to get loans repaid faster over the same period. Super Cheap Automobiles had even worse efficiency efficiency. The ratios performed advise that the company had negative developments on both inventory turnover and debtors’ turnover. This means the company must increase on both areas as a way to attain optimum efficiency. Debts ought to be collected faster to make sure liquidity (Williams, 2008).

Accounts Receivable Turnover:

This ratio is interested in analysing how many moments accounts receivable are paid out within a specified accounting period. When turnover is high, the business enterprise collects cash faster and this makes the business to have a higher level of profit hands (Williams, 2008). The formulation used to compute this ratio is:

Total Net Sales

Accounts Receivable

Accounts Receivable Collection Period:

This refers to just how much time it requires a business to accumulate its accounts receivable from its consumers. The shorter the period the better for the business just like with turnover discussed over. So when a company includes a shorter collection period; the

more likely it really is that it would have more money in hand. The formulation used to calculate this ratio is below:

365 Days

Accounts Receivable Turnover

Accounts Payable Turnover:

This ratio depicts the number of times that a business repays its lenders in a accounting period. When the quantity is high, it implies that the business might have decided to spend its creditor on a later date or it might simply have challenges in repaying its creditors (Weston, 1990).

Cost of Goods Sold

Accounts Payable

Days Payable:

This ratio depict the number of days it takes the business enterprise to pay for accounts payable. When the business takes longer to give; it could lose more money as it might not benefit from numerous discounts linked to the prompt repayment of loans. This ratio could be calculated with the use of the formulation below (Epstein & Jermakowicz, 2007):-

365 days

Accounts Payable Turnover

Inventory Turnover:

This ratio enables economical analysts and businesses to judge the number of occasions that their inventory comes within a particular accounting period. Faster turnover is usually a positive sign that allows a business to improve its cash flow and profit hand. It is just a positive trend that businesses value (Weston, 1990). The ratio is realized as depicted below:-

Cost of Goods Sold

Inventory

Days Inventory:

This ratio is utilized to analyse the average duration that each inventory lasts on the average. When it takes fewer days to sell the inventory, this means there is more money flow and subsequently profit hand. The goal of most businesses is by using fewer days to sell its inventory. Fewer days means increased sales and profits. Days inventory formula ratio may be accomplished using the formulation below:-

365 Days

Inventory Turnover

Sales to Total Assets:

The goal of this ratio is to demonstrate the level of efficiency with which the company generates revenue on its property. It measures the power of the business’s assets to generate product sales (Weston, 1990). This ratio may be accomplished using the formula listed below.

Total Sales

Total Assets

Debt Coverage Ratio:

This ratio is employed to analyse the ability of a business to meet up with its debt burden and the capacity to control more debt. Debt administration is a significant part of business as business always involves financing and borrowing.

Net Earnings + Any Non-Cash Expenses

Principal on Debt

Stability Ratios

The steadiness ratios for ARB happen to be good. The business is enjoying good balance as depicted by all of the ratios performed. All the ratios resulted in confident outcomes. The same was authentic for Super Cheap Vehicles except for the fact that it had negative outcome in its occasions interest rate ratios. This implies that the company must revise its technique for managing debts. This would help to reduce business risks for the company.

Gearing:

Gearing is used to evaluate the proportion of property that have been obtained through loans. The more a organization depends on loans the higher are its survival dangers. This is as the repayment of loans and interest rates are compulsory (Bodie et al, 2004). They aren’t like dividends that may not be paid when the business performs poorly. However, gearing can be extremely beneficial to some businesses that contain strong and predictable cashflow. Gearing could be calculated using the method below:-

Borrowing

Net Assets

Interest cover:

This ratio can be used to measure the ability of a business to meet with payment of rates of interest that are connected with its loans. The query here’s whether the profits created from the business are adequate enough to pay for the interest and additional financial expenses associated with loans. The ratio may be accomplished by using the formula below:-

Operating profit before interest

Interest

Earnings per show (ESP):

This is an extremely important ratio that can be utilized to determine how stable a organization is. It can be used to measure the profit generated per talk about over a specified period. Many investors often make their investment decision by searching at the returns per show in order to know if the business will probably be worth investing into. When a business has high share profits, investors tend to believe that the business has stabilised. As such, they believe trading into such a business would include fewer risks. This ratio can be achieved as described below:-

Ordinary share earnings

Weighted average ordinary shares

Price Earning Ratio:

This ratio is used to gauge the way the marketplace values a particular business. This is employed by comparing the marketplace price per show to the wages per share in a particular business. The amount of earnings can tell whether the market highly values that particular business when it has a relatively higher return in comparison with shares in similar businesses (Groppelli & Ehsan, 2000). In order to get this ratio, the formulation below must be applied.

Market price per share

Earnings per share

Dividend Yield:

This is also referred to as the ratio of spend. It can how to write a technical paper with no mistakes help to tell whether a organization can maintain the payment of a dividend. It also gives an idea of the level of earnings that the business enterprise retains for itself. This proportion is certainly profit that is ploughed back rather than distributed as dividends.

Latest dividend per standard share X 100

Current market price per share

Limitations and Conclusions:

Although financial ratios have been touted for their capability to enable management to evaluate the financial overall performance to analysts and operations, these ratio also have limitations as they can some moments send wrong signals about the financial health and performance of a business (Helfert, 2001). Financial ratios best explain what have happened before and can help management and economic analysts to comprehend business trends. Despite the fact that some trends can help give an idea of what the continuing future of business might appear to be, these ratios cannot provide forecasts for businesses (Bodie et al, 2004).

Ratio analysis is mostly based on accounting data. And this data is mostly drawn from the business’s financial statements. The proper forecast needs to result from the economy instead. That is a major weak point when it comes using financial ratios to make business decision and examination. This is especially true with regards to predicted future trends in business (Groppelli & Ehsan, 2000). These ratios mostly take bank account of figures drawn from the balance sheet. The balance sheet is definitely drafted during certain periods within the economic year and will not take into consideration some important issues. As such, these shape do not truly reflect the off balance sheet data (Watanabe, 2007). These ratios may also differ from one business to the other based on the accounting insurance plan that the business uses. This can help you have numerous ratios and interpretation from the same organization based on what accounting principles it uses (Weygandt, 1996).

APPENDIX A: OUTCOME OF RATIOS PERFORMED

Profitability Ratios

ARB Corporation

Super Cheap Auto

Gross profit margin

Positive

Positive

Net profit margin

Positive

Positive

Return on equity

Positive

Positive

Return on Assets

Positive

Positive

Efficiency Ratios

Asset turnover

Positive

Positive

Inventory turnover

Flat

Negative

Debtors turnover

Positive

Negative

Creditors turnover

Negative

Positive

Current ratio

Positive

Positive

Quick ratio

Positive

Positive

Stability Ratios Outcome

Debt asset ratio (fascination bearing debt)

Positive

Positive

Debt asset ratio (total debt)

Positive

Positive

Debt equity ratio (total debt)

Positive

Positive

Times interest ratios (times)

Positive

Negative