ANALYSIS OF RATIOS

Profitability Ratios:These ratios access the profitability of the company and is said to be the true indicator for accessing the profitability of the ACME Limited. The ratios measure how well ACME Limited can generate operating profits and net profit from their sales.Interpretation: From Appendix One, we can see that from year 2011-2013 there was greater value of return on capital employed. This would mean that ACME Limited generates more earnings per dollars of capital employed as time progressed. Every year the total capital employed by ACME Limited has increased by over 1000 dollars. In terms of the net profit, there was a decreased in loss from 2011-2012, conversely it was not any substantial decrease as oppose the period 2012-2013 where ACME Limited had a profit of twice as much they had lost in the previous two (2) year. Even though the loss decreased, and the profit increased ACME?s other resource of income gradually decrease. This may be due to a number of reasons.ACME?s definitive objective is to advance in its profit margins. Conversely, if you decrease the gross profit margin momentarily, it may be favourable in years to come. ?This may have been ACME Limited strategy in the period 2011-2012, where there may have decreased their gross profit margin by dropping the price of the spare parts or even using a more developed quality to manufacture the spare parts, and thus more expensive, materials to make them? ( The Houston Chronicle). Decreasing the prices may entice new customers, which may in the end cause the company?s profit margins to rise. Similarly, higher quality goods preserve the customers, which too can increase profit margins in the future. If ACME Limited decreases its operating profit margin in the short term, it may raise its operating profit margin to compensate for the loss, by decreasing cost of labour, selling expenses or new purchases.?A lower value of ROCE indicates lower profitability? (AccountingExplained, 2015). ACME Limited has fewer resources, but matching profit as its competitors, they will have a greater rate of return on capital employed and consequently greater profitability. We can tell that the financial condition of ACME LIMITED.is better than previous years.. In comparison to Terra Nova the profitability margins were significantly lower in the two years looked at which means that even if they were to raise their prices and reduce operating costs, there would still be a major gap between marketing of the product and increasing their profit margin without still suffering a loss.Return on Investment (ROI):is a simple calculation used to tell the return of investment. This can help ACME Limited get some perceptions into how to develop their business in the future. We see that ACME Limited in its previous years did not have any returns on money invested which would suggest that their capital employed was not able to breakeven at the end of the financial year and give returns to themselves or their investor (See Appendix five). However, in the latter years we see that there was a positive figure being shown which means that there was improved productivity as well as managing of operating costs.In looking at ACME Limited in comparison to its competitor Terra Nova, there is the significant increase in the capital employed which suggests that they did not have a very strong starting point between the close of 2012 and opening of 2013. (See appendix three) And moving from a significant loss to a slight profit in 2013 suggests that Terra Nova and their competitive strategy was not enough to overpower ACME Limited (See appendix three and five).Liquidity:Liquidity ratios are the most accommodating for creditors but just as important to financial managers. In doing a complete liquidity ratio, this will help ACME Limited expose any weakness in the business financially.Current ratio: this ratio will show the proportion of ACME?s current assets in the business in relation to its current liabilities.Current Ratio = Current Assets / Current Liabilities.?Calculating ACME?s current ratio will help the company determine the extent to which the current liabilities of their business (i.e. liabilities due to be settled within 12 months) are covered with its current assets (i.e. assets expected to be realized within 12 months)? (Accounting-Simplified, 2015). Therefore using 2013 figures, we see that for every liability,ACME Limited owes there is $2.79 to cover it. For the past 3 years the current ratios were approximately two (2), it would mean that the current assets are adequate to cover for twice the amount of ACME?s liabilities. It must be analysed in the perspective of the spare part industry which ACME Limited relates to, and the inclination of the ratio must be perceived over a period of time.A current ratio of one (1) will ensure that the value of their current assets covers at least the amount of ACME?s short term liabilities. The current ratio of ACME is above one (1). This means that it provides for additional cushion against any unpredictable eventuality that may arise in the short term. Having a current ratio over two (2) is expected in manufacturing companies such as ACME Limited because of their working capital investment. ACME?s current ratios are increasing. To reduce the current ratios, they should, reduce the size of their inventory, which would lead to a reduction in the working capital investment. In relation to Terra Nova, we see that the Current Ratios came up to on or about 2 as well which would suggest more than likely the same situation and conditions of a manufacturing company for both organisations. (See Appendix five).Quick Acid Test: ?shows the ratio of cash and other liquid resources of an organisation in comparison to its currents liabilities? (Accounting-Simplified, 2015).Quick Ratio = (Current assets ? Stock)/Current liability. Quick Ratio shows the amount of money and other current assets that are readily transformable into money in contrast to the short term commitments of an organization. Where businesses have a slow turnover, liquidity becomes an issue, which would suggest that the cash cycle is probably long. The more uncertainty ACME Limited business setting is the most likely that they would maintain a higher quick ratio. Conversely, if ACME?s cash flow is constant and foreseeable, then ACME Limited would seek to keep a quick ratio at a lower level.The acid test shows that ACME Limited is lower than the industry average which means that they are attracting too much of threats by not sustaining a proper safeguard of liquid resource, and this can change if they have better credit facility with their suppliers and other spare parts industry. Where businesses have slow stock turnover that is where most stocks are not very liquid this will mean that the cash cycle is probably long. This is where the quick/acid test ratio is calculated. From the calculations, we see that for every liability owed there is $1.6 to cover it and through the years ACME Limited has maintained an acid ratio that is relatively steady.In comparison to Terra Nova where was only a $1.2 to cover in 2013 we see that ACME Limited is suggestively marketing their product in the right manner in order to turn assets into revenue at a higher rate than Terra NovaEfficiency ratio: also known as an active ratio is used to judge how efficiently a company is using its assets. In 2013, ACME Limited assets turnover ratio was 1.52. In comparison to the other previous years, the analysis indicates that ACME Limited has used its assets more efficiently during 2013.The debtor?s turnover indicates how effective the company is in collecting its sales on credit. It shows the deteriorating capability in achieving the efficiency in credit procedures with regards to converting accounts receivable to cash. It takes ACME Limited 90days to collect payments; most company will allow 30days terms and conditions, which means it is taking 3 times as much to collect cash payment from the normal 1month period. . We see that Terra Nova takes more or less the same time to collect on their investments which shows that their ability to gain return on investments is almost as doing as well as ACME. (See Appendix five)The creditor?s turnover indicates how effective the company is paying its debts. It shows that the company is paying back faster than it can receive its monies from debtors. If most companies give a 30 day payment plan, then ACME Limited should consider utilizing the actual 30 days credit instead of using their funds for payments before time.There is a weakness in maintaining the efficiency in managing its inventory levels. The higher the inventory turnover suggests the company may have a better inventory quality and more efficient buying practices. It takes 68 days to turnover stock but it takes half that time to pay back our creditors this means that the company does not have an effective control on its stocks. We cannot produce as fast as we repay and we are not collecting as fast to produce. It means that they are not efficient in generating revenue. In comparison to the three (3) years, ACME Limited seems to be gradually doing better in terms of payable in days and receivable in days, but clearly shows a weakness in the stock turnover.Gearing ratio: is used to adjudge the debt and equity component in the capital structure of the company. In other words, these ratios indicate the percentage of operations being financed with borrowed funds.Debt to Equity ratio indicates the true capital structure of the company. Low debt-Equity ratio is more favourable amongst investors as it indicates low financial risk in the company. According to the data, ACME Limited gearing ratio at 2013 was 2.77%, an increase from 2012 and 2011. This is because the business increases its finance lease operations every year.Most companies have to borrow money if they are to have the funds to expand, and invest in new machinery and equipment. Some of the investment can be funded from profits they have made, or from the issue of shares, but often it has to be borrowed. The more they borrow the more interest they pay.This borrowing is a risk because they have to pay the interest whether the investment is a success or not. Even if they are making a loss they still have to pay their interest. Borrowing is thus a risk. The more of their capital that is borrowed the bigger the risk.As outsiders looking at a set of accounts, we consequently would want to assess how big that risk is, and to do this we use the gearing ratio. The gearing ratio measures the proportion of the company?s total capital that is borrowed,The capital employed figure on the bottom of the ratio is the total amount of capital the company has at any time. It is the same as the shareholder?s equity and is the figure that balances on the balance sheet.The higher the gearing ratio, the bigger the proportion of the company?s money that is borrowed, and consequently the bigger the risk. A company with a high gearing ratio is in a very dangerous situation if interest rates are going up. Their interest payable bill will be rising fast, with no corresponding increase in sales revenue. The first thing to suffer is the company?s profit. ACME?s gearing ratio nonetheless, is relatively low, thus their level of risk is not alarming. As welook at their competitor Terra Nova we see that their gearing ratio crosses over 8.5 which suggests that their borrowing pattern elevated greatly between 2012 and 2013 which would also suggest that they would not be very big on competition for the coming years as these figures would suggest a high rate of losses due to payback periods and loan repayments.Investor Ratios:are used by investors, particularly to judge financial valuation or to judge whether the company is worth an investment. During 2013, ACME Limited EPS for its shareholders was 0.13. However, in comparison to the other years, the EPS of the company had improved in comparison to 2011.We also see that in ACME Limited,there was a ratio between 0.10 and 0.13 which suggests that there would be a steady flow of income for investors per year. In comparison with Terra Nova we see that there is also a steady investor ratio per year, however, decimal for decimal there is no doubt that the better choice of investment would be with ACME, simply because based on pure ratio values there would naturally be a higher rate of return per year with our organisation.(All analysis made was done under the referral of Appendix One to Five.)APPENDIX ONE (1)ACME LIMITED.FINANCIAL STATEMENTS FOR 3YRS 2011-2013INCOME STATEMENT2011 2012 2013$?000 $?000 $?000Revenue 53580 54200 64,146Expense (54,084) (56,116) (62,504)Profit (loss) from Operations (504) (500) 1,642Finance expense (268) (280) (395)Other Income 32 29 27Profit (Loss) before Taxation (740) (700) 1274Taxation 24 272 (483)Profit (loss) for the period (716) (3892) 791Earnings per share for profit attributable to theequity holders of the Company(express in $ per share) (0.12) (0.66) 0.13APPENDIX TWO (2)BALANCE SHEET ACME LIMITEDASSETSNon current AssetsProperty, plant & equipment 5,040 5,812 5,908Retirement Benefit Assets 1,682 3,484 8,6736,722 9,296 14,581Current AssetsInventories 13,931 14284 11,637Debtors 17,974 16,923 15,731Cash 6 6 631,911 31,213 27,374TOTAL ASSESTS 38,633 40,509 41,955EQUITY AND LIABILITIESCapital and ReserveShare Capital 5,905 5,905 5,905Revaluation Reserve 1,834 1,965 1,965Retained profits 17,155 18,000 20,96924,894 25,870 28,839Non current LiabilitiesFinance lease obligations 99 154 168Deferred Taxation 1,170 2,200 3,028Deferred Income 77 97 1021,346 2,451 3,298Current LiabilitiesCreditors 6,922 7,000 5,867Bank overdraft 4,900 4,735 3,488Current position of finance lease obligations 53 53 53Taxation provision 518 400 41012,393 12,188 9,818TOTAL EQUITY AND LIABILITIES 38,633 40,509 41,955APPENDIX THREE (3)TERRA NOVA TRINIDAD LIMITED.FINANCIAL STATEMENTS FOR 2YRS 2012-2013INCOME STATEMENT2012 2013$?000 $?000Revenue 47300 54,930Expense (47,996) (54,220)Profit (loss) from Operations (696) 710Finance expense (200) (418)Other Income 14 30Profit (Loss) before Taxation (882) 322Taxation 272 (212)Profit (loss) for the period (610) 110APPENDIX FOUR (4)BALANCE SHEETTERRA NOVA TRINIDAD LIMITEDASSETSNon current AssetsProperty, plant & equipment 4,140 4,436Retirement Benefit Assets 3,972 5,9988,112 10,434Current AssetsInventories 12,345 10,450Debtors 15,800 14,100Cash 3 328,148 24,553TOTAL ASSESTS 36,260 34,987EQUITY AND LIABILITIESCapital and ReserveShare Capital 5,238 1,876Revaluation Reserve 2,004 4,800Retained profits 14,000 13,32521,242 20,001Non current LiabilitiesFinance lease obligations 200 180Deferred Taxation 2,450 2,990Deferred Income 80 902,730 3,260Current LiabilitiesCreditors 8,000 7,670Bank overdraft 3,770 3,688Current position of finance lease obligations 60 58Taxation provision 458 31012,288 11,726TOTAL EQUITY AND LIABILITIES 36,260 34,987APPENDIX FIVE (5)RATIO CALCULATIONS.ACME LIMITEDYears Profitability Liquidity Efficiency Gearing InvestorROCE ROI Profit Margins Current Ratios Quick /Acid Test Asset Turnover Ratio Debtor collection period Creditor collection Period Stock turnover Debt /Equity Gearing Ratio EPS2011 -1.22 (21) -1.38 2.57 1.45 1.39 122 33 94 1.65 0.18 0.122012 -1.16 (3) -1.29 2.56 1.39 1.34 114 31 93 2.54 0.28 0.662013 3.98 2 1.99 2.79 1.60 1.53 90 20 68 2.77 0.26 0.13TERRA NOVA TRINIDAD LTD2012 -2.43 -954 1.29 2.29 1.29 122 61 94 2.35 3.68 0.122013 0.92 528 0.2 2.09 1.2 94 71 71 6.25 8.75 0.10APPENDIX SIX (6)(Ratio Calculation Workings)ACME LIMITED:Profitability 2011:? ROCE: Net Profit/Capital Employed x 100 [ (504+32)/38633 x 100]? ROI: Profit ? Interest [ (504+32)-24/24]? Profit Margin: Net Profit/Revenue x 100 [ (740/53580) x 100]Profitability 2012:? ROCE: (500+29)/40509 x 100? ROI: (500+29)-272/272? Profit Margin: (700/54200) x 100Profitability 2013:? ROCE: (1642+27))/41955 x 100? ROI: (1642-27)-483/483? Profit Margin: (1274/64146) x 100Liquidity 2011:? Current Ratio: Current Assets/Current Liabilities [(31,911/12,393)]? Acid Test Ratio: Current Assets ? Stock/Current Liabilities [(31,911-3,931)/12,393]Liquidity 2012:? Current Ratio: (31,213/12,188)? Acid Test Ratio: (31,213-14,284)/12,188Liquidity 2013:? Current Ratio: (27,374/9,818)? Acid Test Ratio: (27,274-11,637)/9,818Efficiency 2011:? Debtor Collection Period (in days): Debtors/Revenue x 365 [17,974/53,580 x 365]? Creditor Collection Period (in days): Creditors/ Expenses x 365 [4,900/54,084 x 365]? Stock Turnover (in days): Stock/Expenses x 365 [13,931/54,084 x 365]Efficiency 2012:? Debtor Collection Period (in days): 16,923/54,200 x 365? Creditor Collection Period (in days): 4,735/56,116 x 365? Stock Turnover (in days): 14,284/56,116 x 365Efficiency 2013:? Debtor Collection Period (in days): 15,731/64,146 x 365? Creditor Collection Period (in days): 3,488/62,504 x 365? Stock Turnover (in days): 14,284/62,504 x 365Gearing Ratio 2011:? Debt/Equity: Total Liabilities/Shareholder Equity [(99/(5,905+99) x 100]? Gearing: Long Term Debt/Equity ? Long Term Debt x 100 [99/53,580 x 100]Gearing 2012:? Debt/Equity: 154/(5,905+154) x 100? Gearing: 154/54,200 x 100Gearing 2013:? Debt/Equity: 168/(5,905+168) x 100? Gearing: 168/64,146 x 100Investor Ratio 2011:? EPS: Net Profit/Share Capital [ (716)/5905]Investor Ratio 2012:? EPS: 3892/5905Investor Ratio 2013:? EPS: 791/5905TERRA NOVA TRINIDAD LIMITED:Profitability 2012:? ROCE: Net Profit/Capital Employed x 100 [ (882)/36260 x 100]? ROI: Profit ? Interest [ (696)+14 ? 272]? Profit Margin: Net Profit/Revenue x 100 [ (610)/47300 x 100]Profitability 2013:? ROCE: 322/34987 x 100? ROI: 710 ? 212? Profit Margin: 110/54930 x 100Liquidity 2012:? Current Ratio: Current Assets/Current Liabilities [28148/12288]? Acid Test Ratio:Current Assets ? Stock/Current Liabilities [28148 ? 12345/12288]Liquidity 2013:? Current Ratio: 24553/11726? Acid Test Ratio:24553 ? 10450/11726Efficiency 2012:? Debtor Collection Period (in days): Debtors/Revenue x 365 [15800/47300 x 365]? Creditor Collection Period (in days): Creditors/ Expenses x 365 [8000/47996 x 365]? Stock Turnover (in days): Stock/Expenses x 365 [12345/47996 x 365]Efficiency 2013:? Debtor Collection Period (in days): 14100/54930 x 365? Creditor Collection Period (in days): 7670/54220 x 365? Stock Turnover (in days): 10450/54220 x 365Gearing Ratio 2012:? Debt/Equity: Total Liabilities/Shareholder Equity [12288/5238]? Gearing: Long Term Debt/Equity ? Long Term Debt x 100 [200/5238 + 200 x 100]Gearing 2013:? Debt/Equity: 11726/1876 x 100? Gearing: 180/1876 + 180 x 100Investor Ratio 2012:? EPS: Net Profit/Share Capital [ (610)/5238]Investor Ratio 2013:? EPS: 110/1876Category: Essay Writing

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