Ratio Analysis- Accounting, Sample of Research papers

6 pages, 2588 words

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|CASE STUDY: CHANNEL TECH LTD |

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TABLE OF CONTENTS

INTRODUCTION…………………………………………………………………………3

METHODOLOGY…………………………………………………………………………3

RESEARCH AND FINDINGS……………………………………………………………3

DISCUSSION AND COMMENTS………………………………………………………6

CONCLUSION…………………………………………………………………………….13.

REFERENCES……………………………………………………………………………14

INTRODUCTION:

Financial Statement analysis and interpretation is the most significant step in accounting to get a clear idea about the profitability and financial position of the company. Ratio analysis is one of the financial instruments to measure the fiscal position of the company. Ratio analysis helps the management in decision making process and Control. Analysis and Interpretation are closely related concepts. Interpretation is impossible without analysis. If the financial statement is prepared without interpretation and analysis, it has no value. Analysis can be done based on the data given in the financial statement. Ratio analysis clearly reveals the deviations and weakness of the firm. It helps in forecasting and planning of the organisation.

PURPOSE:

The purpose of this report to review the financial position of the Channel Tech Ltd for December 2011 and 2012 by using Ratio analysis. The calculations are shown clearly. Then the profitability, liquidity, efficiency, asset utilization, gearing and the overall performance of the company are deeply discussed and analysed. By comparing these elements, we can suggest the ideas to improve the business operations and financial performance of the company.

METHODOLOGY:

The information is collected from the reading resources and by referring from some accounting books and articles from the internet. The calculation part has been done by using the standard accounting formulas using by the organisations. These formulas will help to get the accurate answers and it discloses the monetary position of the Channel Tech Ltd.

RESEARCH AND FINDINGS:

Research and Findings include the computation part and the discussion part about the various financial elements of the enterprise. The computation portion reveals the changes in the gross profit margin, Net profit margin, gearing, return on capital employed, total asset turnover, liquidity and efficiency ratios.

A) CALCULATION:

FINANCIAL RATIO ANALYSIS FOR THE CHANNEL TECH LTD FOR THE YEARS ENDED 31st DECEMBER 2011 AND 2012

PROFITABILITY RATIOS:

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|Gross profit Margin |Gross profit/ |86872/289575 |81378/332640 |38% |

| |Turnover *100 |*100 |*100 | |

| | |= 30% |=24.46% | |

3 pages, 1472 words

The Business plan on Ratio and Financial Statement Analysis

This paper analyzes tools used in financial analysis such as ratios. Financial ratio analysis is a judicious way for different stakeholders to use for different goals. This paper demonstrates that financial ratio analysis is an important instrument to estimate resources and their used. It also demonstrates that despite the fact that financial ratio analysis is an excellent tool, it does have ...

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|Net profit Margin |Net profit before |9503+1782/ 289575 * 100 |13811+2376/332640 |4.5% |

| |interest/ Turnover *100 |=3.89% |*100 | |

| | | |=4.86% | |

| | | | | |

|Return on Capital |Net profit before |11285/67567 |16187/84496 |17.85% |

|Employed |interest/ (shareholder’s |* 100 |*100 | |

| |funds+ Debentures) |=16.70% |=19.15% | |

| |*100 | | | |

LIQUIDITY RATIOS:

| | | | | |

| | | | | |

|current ratio |Current Assets/ Current |50193/25097 |57915/28364 |1.95:1 |

| |Liabilities |= 2:1 |= 2.04:1 | |

| | | | | |

|Quick Ratio |Current Asset- Stock/ Current|50193-14553/ 25097 |57915-19008/ 28364 |1.25:1 |

4 pages, 1670 words

The Term Paper on Intel Gross Margin

Intel Results of operations. Intel broke a record in net revenues in 1995, for the ninth consecutive year, rising by 41% from 1994 to 1995 and by 31% from 1993 to 1994. Higher volumes of the rapidly raising Pentium microprocessor family, partially offset by lower prices, and increased sales of related board-level products were responsible for most of the growth in revenues in 1994 and 1995. ...

| |Liabilities |=1.42:1 |= 1.37:1 | |

EFFICIENCY RATIOS:

| | | | | |

| | | | | |

|period |* operating days |*260 |*260 | |

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|ratio |sales*operating days |* 260 |*260 | |

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ASSET UTILIZATION RATIOS:

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2 pages, 686 words

The Business plan on Ratio Analysis Profit Margin

Companies strive from day to day to make their business publicly strong, financially strong, and appeasing and profitable for its shareholders. Shareholders as well as the company's management use several tools to determine a company's health and direction. These tools are better known as ratio analysis. Ratios are among the more widely used tools of financial analysis because they provide clues ...

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GEARING RATIO:

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|gearing ratio |non-current liabilities/Capital|17820/67567 |23760/84496 |30% |

| |Employed * 100 |*100 |* 100 | |

| | |=26.37% |=28.12% | |

DISCUSSION AND COMMENTS:

PROFITABILITY RATIOS:

The profitability ratio includes three types of ratios.

1. Gross profit Margin

2. Net Profit Margin

3. Return on Capital Employed.

The ratios helps to analyse how much amount of money a company obtained from its total revenues or sales.

GROSS PROFIT MARGIN:

This ratio expresses the relationship between the Gross profit and Net sales. In general, it denotes the effectiveness of production and trading activities. If the company has high gross profit, it indicates the symbol of good management and also states that the cost of production is moderately low. Gross profit margin is the famous method to benchmark against rival firms (Kannan, 1975).

It indicates the profitability of the company before overhead costs. It measures the effectiveness of the management in utilising its resources, materials and labour in the production process. If the company has high gross profit margin, the overheads do not increase.

8 pages, 3765 words

The Business plan on Wal Mart Capital Company Ratio

... 7.6 7. 8 Profitability Net Profit Margin 3. 03 3. 26 3.59 Payout Ratio. 19. 17. 23 Table Industry Averages Fiscal Year 2001 ... working capital.Underperforming Company Ratios Although Wal-Mart is performing well overall and remains a leader within the retail industry, the company is not ... or equity. The market value can indicate a considerable higher value than the indicated book value. Hence, only the ...

COMMENT:

The gross profit margin marginally declines from 30% in 2011 to 24.46% in 2012. When compared to Industry average the gross profit margin is very low. It shows that the company is unable to control the production costs and the company is getting low amount of incomes from the profits (Kannan, 1975).

Low profit margin also indicates that the company is under- pricing. The performance of the company was not good for the past 2 years. It shows the decline of 5.5%. It is due to the increase in the cost of sales of the company. It’s vital to recollect that gross profit margins can vary extremely from business to business and from industry to industry. For example, the airline industry has a gross margin of about 10%, while the software industry has a gross margin of about 80% (Ready ratios).

NET PROFIT MARGIN:

This ratio compares net income with sales. It is used to measure the overall performance of the company. It indicates the net profit percentage for the investors from sales after deducting all the overheads (Kannan, 1975).

If there is an increase in the net profit it reveals the good performance of the company.

COMMENT:

The Net profit margin is increased from 3.89% to 4.86%. So there is a growth in the business operations. It indicates high margin of safety for this company (Ready ratios).

It is slightly higher than industry average. Like gross margin, net profit margins also differ from industries. It is used for internal comparison analysis. The Channel Tech Ltd shows high net profit margin. The company’s administration is overall good and they have great support of net profit margin to safeguard themselves in times of difficult circumstances. The future price policy of Channel Tech will be high due to high net profit. For example: In Software industry, we can see the high gross margin and low net margins because the marketing and administration costs are very high and cost of sales and operating costs are very low. After calculating the net profit margin, it can be compared to other competitive companies. It is used to overtake other rival competitors by pricing war. As it differs from company to company and year on year, the net profit after tax is calculated by deducting the minority interests and adding the equity income (Ready ratios).

5 pages, 2120 words

The Term Paper on Ford Motor Company Ratio Turnover Equity

Ford Motor Company GROUP PROJECT ACC 505 - FINANCIAL ACCOUNTING 12/01/96 TABLE OF CONTENTS DESCRIPTION PAGE INTRODUCTION... 1 LIQUIDITY... 1-3 Working Capital... 1 Current Ratio & Quick Ratio... 2 Receivable Turnover & Average Days's ales Uncollected... 2-3 Inventory Turnover & Average Days' Inventory on Hand... 3 PROFITABILITY... 3-7 Profit Margin... 3-4 Asset Turnover... 4-5 Return ...

RETURN ON CAPITAL EMPLOYED:

This ratio specifies that how much profits can earn from the investments made by the shareholders in the company. It is expressed in percentage terms. Return on capital employed helps the management to know the status of their profitability of capital investments made in the company.

COMMENT:

The Return on capital employed shows a development in 2012. It is increased from 16.70 % to 19.15% in 2012. It is also higher than the industry average. It clearly states that the company is doing well in its activities. There is no risk associated in the company business. It is good to be higher than the rate of borrowings of company from other sources. If there is any increase in borrowings then it reduces the shareholder earnings. The company should always focus on the return on capital employed. ROCE brings out the risk associated with the business. If there is low risk means, it can be compared to the interest rates of shareholder’s investment.

LIQUIDITY RATIOS:

It includes two types of ratio namely

1. Current ratio

2. Quick ratio

CURRENT RATIO:

The current ratio is also known as working capital ratio. It measures the management’s efficiency to pay the debts over the next twelve months. It helps to observe the company’s ability to meet the short term debts. In other words, it measures the company’s ability to pay the current liabilities with its current assets.

COMMENT:

The usually acceptable current ratio is 2. For most of the industries, the acceptable ratio is 1.5. The current ratio shows 0.4% higher in 2012. It slightly increased from 2% to 2.04%. It is higher than the industry average It denotes the comfortable and satisfied financial position of the company. The company is using its current assets and short term financing resources properly. It can be able to pay the debts over the next 12 months. If the current asset ratio is high, it clearly indicates that the current assets are dependent on inventory. From the company point of view, if it is very low means it indicates some problems in working capital management.

QUICK RATIO:

Quick ratio is viewed as the symbol of company’s financial strength or weakness. It is also known as Acid test ratio. It gives the information of company about the short term liquidity.

COMMENT:

The quick ratio is dropped from 1.42:1 to 1.37:1. It is somewhat higher than the industry average. If the company’s quick ratio is high. It shows that the company is better position. The Channel Tech is in good financial position. The commonly acceptable ratio is 1 for most of the industries. If it is less than one the company cannot pay back its current liabilities. It is a bad sign of shareholders and the management. This ratio helps the creditors to find out how much of the company’s short term debts can be achieved by quickly selling the company’s liquid assets.

EFFICIENCY RATIO:

Efficiency ratio helps to analyse how the company is efficiently using assets and liabilities within the company. It helps to measure the quantity and the usage of equity. It helps to improve the internal working of the firm. It helps the company to achieve high profitability and the cash flow of the firm. It includes three types of ratios.

1. Debtors collection period

2. Creditors payment period

3. Stock turnover ratio

DEBTORS COLLECTION PERIOD:

It is also known as Debtor days or Debtors turnover ratio. This shows the average number of days taken by the debtors to pay the money they owe to the company.

COMMENT:

The ratio is marginally lower than 2011. It is reduced from 40.57 days to 40.09 days. It is lower than the Industry average. When the number of days becomes low, it is good to know that the company is able to manage its debtors and it is more efficient in collecting its debts. If it is higher, the company can’t able to manage the debts and they will face more difficulties in collecting the debts. It should be calculated against the standard value operated by the company in the financial market. The debtors’ collection period is compared with the equivalent ratio at the time of making payment to creditors.

WAYS TO IMPROVE REDUCE DEBTORS:

• Stressing on payment of cash.

• Providing short span for credit period payments.

• By announcing fines for late payments.

• By providing incentives for correct payments

• By using debt factors

CREDITORS COLLECTION PERIOD:

It is also called as creditor days which are the average number of days for the business to repay the money to its creditors. It is important to analyse the number of days taken for a business to repay its suppliers as the continued late payment might result in obtaining the future credit facilities from the suppliers.

COMMENT:

Generally this value should be higher than the debtor’s collection period. If it is low, it will lead to cash flow problems. The creditor’s collection period is declined from 36.9 to 32.36 days in 2012. Then it is lower than the industry average. It is lower than the debtors’ collection period. So the firm is having few difficulties with the cash flow. If it shows more days, it means that the company will take more time to repay its loan amount to the creditors because of huge credit.

STOCK TURNOVER RATIO:

This is the most important ratio that every business has to concentrate. Because it evaluates the number of times at which the company can sell its products and refills its stock. The sales are valued at the cost.

COMMENT:

The stock turnover ratio has fallen from 13.93 times in 2011 to 13.22 times in 2012. Then it shows high decline when compared to industry average. Nearly it shows 5.28 times reduction when compared to industry average. This shows that the company is in bad position. It reveals two main points. The first one is the company is keeping too much of stock. The second one is the company is facing more difficulties in selling its products. The Channel Tech Ltd is not able to sell its products. They have to adopt different marketing strategies to improve their selling concept. In general if the stock turnover ratio is high, it shows the company sell its goods very fast and they implements the just in time policy. The company’s lead time is short and the product is perishable. It is calculated in two ways. If it is calculated in number of times, the higher the stock turnover shows the efficient operating of business. If it is calculated in number of days, lower the stock turnover the ratio shows the business is more effective.

WAYS TO IMPROVE STOCK TURNOVER RATIO:

• To increase the stock turnover the company constricts the inventory control and they should improve the checking procedures of the stock.

• By increasing the sales rate without showing high difference in the level of stock.

• By lowering the level of stock without dropping sales level.

ASSET UTILIZATION RATIO:

It is also known as Total Asset turnover ratio. It helps to measure the success of the company from which they are utilising its assets in a proper manner to generate revenues from them.

COMMENT:

The asset turnover ratio declines from 3.13 times in 2011 to 2.95 times. It is a bit lower than the industry average. It shows the low figure. So the company’s business performance is low. The Channel Tech Ltd shows ineffective use of assets. It indicates the assets are out-dated. This ratio clearly denotes the company is unable to use its assets in a proper manner and it is in weak situation (Business Finance, 2013).This will result in shut down of the company also. So the company should try to improve their performance.

GEARING RATIO:

Gearing ratio is used to analyse the capital structure of the company and the financial position for the long term.

COMMENT:

As per the financial statement the industry average of gearing ratio is 30%. The level of gearing in 2011 is 26.37% and it shows improvement in 2012 as 28.12%. But it is still lower than the industry average. This ratio suggests that the company will able to obtain funds from borrowing, if it is needed. To some extent the company is in safer zone. It is very essential to company and the potential financiers. If it shows high level of gearing, then the company will get larger proportion of funds from borrowings.

CONCLUSION:

The overall performance of the company is deeply analysed. The performance of the company in 2012 is not good when compared to 2011. It is not satisfactory to the investors. The company shows more dropping levels in efficiency ratios, quick ratio, gross profit margin and asset utilization ratio. It obviously indicates that the company is not using its assets and resources efficiently. The company is facing more difficulties in selling their products. They are unable to control the production costs. This is due to the increase in cost of sales. They are earning low amount of profits. The company shows decline in the creditor’s collection period and stock turnover ratio. This indicates that the company is experiencing some problems with the cash flow (Kannan, 1975).

The company shows slight improvement in net profit margin, gearing and return on capital employed. It is suggested that the company can able to borrow funds from debtors to improve the business performance.

References

Company partners (2003).

http://www.companypartners.com/content/resource/understanding-financial-ratios. Retrieved on 13 January 2013

Business Finance (2013).

Ready ratios (2013).

http://www.readyratios.com/reference/profitability/return_on_capital_employed.html Retrieved on 13 January 2013.

Investopedia (June 2011).

http://www.investopedia.com/articles/fundamental/04/042804.asp#axzz2HVUhCqhc. Retrieved on 13 January 2013.

QFinance (2012).

http://www.qfinance.com/balance-sheets-calculations/gross-profit-margin-ratio. Retrieved on 13 January 2013.

Kannan. S (1975).

Management Accounting. Theory, Problems and Solutions. Third Edition. Pg.: 167 – 250

Tutor2u (2013).

http://www.tutor2u.net/business/presentations/accounts/efficiencyratios/default.html

Retrieved on 13 January 2013

PURPOSE:

METHODOLOGY:

RESEARCH AND FINDINGS:

References

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