Harrod : Ratio Analysis

Profitability ratios are used to measure the overall efficiency of thebusiness, as well as management effectiveness. Examples of profitability ratios include the gross margin ratio and the net margin ratios.

Accounts payable days saw a major increase going from 49 days in ’93, to 65 days in ’94. Although Wiegandt has been flexible with credit terms, Baum is far exceeding the net 30 terms and is not taking advantage of any discounts.

As long as the current ratio, which takes inventories into account, is higher than 1, they do not experience any problems repaying their short-term liabilities. However, the quick ratio is smaller than 1 and has marginally decreased in 2011. Due to this Next Plc might have problems paying off their short-term liabilities if sales decreases in the next years.

Profit Margin: -This ratio relates the operating profit to the sales value (Walker, 2009). It tells us the amount of net profit per pound of turnover a business has earned.

These ratios will help us see how effective a company is at using their sales or assets and turning this into income.

I. Rate of Return on Total Assets: Measures the company’s profitability relative to total assets. A percentage increment for Company G, from 12.30% to 13.68% (2011-12) keeps them above industry benchmarks (8.60% and 12.30%). Rate of Return on Total Assets represents strength for Company G.

Rapid cash collections are indicative of high turnover; however, loss of customers to rival firms and tight credit levels arise from extremely high accounts receivable turnover level, (Horngren, 2013, p. 805).The accounts receivable turnover for Harry Jones in 2014 was 7.93 times. This figure decreased to 5.63 times in 2015. Both figures are less than the industry average of 9 times. Low inventory turnover levels might be attributed to reduced accounts receivable turnover levels throughout both 2014 and 2015. Inventory levels can be increased in the future to achieve higher accounts receivable turnover, (Horngren, 2013, p. 805).

The first ratio used in the financial analysis was a profit ratio which is the Return on Total Assets (ROA).

So while the company increased its net income, it has done so with diminishing profit margins.

fraction of pretax earnings that the shareholders keep. One minus that ratio is the average tax rate so the

The graph above shows a current ratio. It is used for measuring an ability of the company to pay off

The calculation of ratios is the calculation technique for analyzing a company’s financial performance that divides or standardize one accounting measure by another economically relevant measure. Financial ratios can be used as a tool to demonstrate financial statement users for making valid comparisons of firm operating performance, over time for the same firm and between comparable companies. External investors are mostly interested in gaining insights about a firm’s profitability, asset management, liquidity, and solvency.

Britvic PLC was compelled in 2007 to increase with approximately 10 days the period in which credit customers pay their liabilities, so that the impact of economic recession over the organisation’s profit was reduced by maintaining the drop in the level of sales at an acceptable level. One year later, in 2008, an 8 days decrease in his ratio was recorded, followed by a 2 days increase in 2009. As reported by their financial statements, the debtors’ days ratio has been stable for the past two years, a sign of recovery after the economic recession, but not as low as in the economic boom, characteristic for the 2005-2006 period.

This ratio is expressed in percentage. If the ratio is high it shows that the company is utilizing its assets in better way to generate its income. If the ratio is less it shows that the company is in difficult position to meet its debt. Formula to find the return on assets ratio is: - return on assets = net profit / total assets. Whereas net profit means the amount arriving after deducting all the expenses which includes taxes also. In addition to this he also explains about the profit margin ratio (PMR). PMR is the ratio which expresses the relationship between profit and sales. Formula used to find the PMR is: - Profit margin ratio = net profit/net

Ratio analysis is the fundamental indicator of company’s performances for so many years; it is also can be seen as the very first step to measure a company’s performance along with its financial position. Moreover, ratio analysis has been researched and developed for many years, Bliss had presented the first coherent system of ratios, and he also stated that ratios are “indicator of the status of fundamental relationship within the business” Horrigan (1968). However there are some arguments on whether the ratio analysis is useful or not since to conduct these analyses will be costly to the company, also there are several limitations on how these ratios work. Therefore, the usefulness and the limitation of ratio analysis will be discussed further in this essay, with the use of easyJet’s annual report as examples.