Example of a Financial Ratio Analysis for a Trading Company

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Trading Company AFS

FINANCIAL ANALYSIS OF THE TRADING COMPANY (PTY) LTD
Holistic over view of operating performance
(Using a traffic light system to quickly highlight performance) 1. RONA - Return on Net Operating Assets 2010 18.4% 2009 21.2%

Net Operating profit (Income Statement) Net Operating Assets (Balance Sheet)

135 735

84 396

Note: Net Operating Assets - take total net Assets, and add back cash, overdraft balances, tax and dividends. These are financing factors, and are not part of operations ' responsibility 1 a. Profitability Net Operating profit (Income Statement) Sales 9.0% 135 1500 7.0% 84 1200

1 b. Asset efficiency (sweat) Sales Net operating Assets

2.04 1500 735

3.03 1200 396

Conclusion:
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This has not changed in the current year, as the current assets have climbed significantly over the prior year. The Current ratio indicates a further deterioration with the ratio moving upwards to a more elevated level, the performance remains very weak, with expensive capital tied up in short term assets. The Quick ratio reflects the cash flow challenges as a level of 3.9 is far too high - too much funds stuck in receivables and inventories. Just how quickly can the company realise Receivables and Inventories to settle the short term debt facing the company? Interest cover has declined significantly as a result of increased long term debt, and related finance charges. While still well within tolerance, an eye must be kept on developments over time - i.e. trend analysis

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Trading Company AFS

2010 5. Capital Structure 5 a. Gearing - long term debt Long Term Debt Equity 120.6% 410 340

2009

25.0% 80 320

4b. Gearing - total Debt Total Debt (Long term debt plus current liabilities) Equity

151.5% 515 340

43.8% 140 320

Conclusion: Long term gearing is a problem and is well above the agreed level set by the Board of Directors (40%). By being so highly geared, the company runs the risk of high interest rate expense, as well as tight scrutiny from the lenders of the funds. Further borrowings will be out of the

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