Ratio Analysis : The Performance Of The Company

Ratio analysis is a tool brought by individuals used to evaluate analysis of information in the financial statements of a business. The ratio analysis forms an essential part of the financial analysis which is a vital part in the business planning. There are 3 different ways of assessing businesses performance and these are: solvency, profitability and performance. Ratio analysis assists managers to work out the production of the company by figuring the profitability ratios. Also, the management can evaluate their revenues to check if their productivity. Thus, probability ratios are helpful to the company in evaluating its performance based on current earning. By measuring the solvency ratio, the companies are able to keep an

The following report is a brief comparative analysis of two of Australia’s largest deposit-taking financial institutions (FI), Australia and New Zealand Banking Group Ltd. (ANZ) and Westpac Banking Corporation (Westpac). This report seeks to identify which of the FIs has a greater aggregate return per dollar of equity and thus establish the highest performer, or most profitable, of the two. The Return on Equity Model (ROE) (Koch & MacDonald,

Ratio analysis will be used to measure the profitability, liquidity and efficiency of the named business and to analyse the performance of the business using ratio analysis.

Ratio analysis shows the correlation within certain figures of financial statements, like current assets and current liability, and is used for three types of company needs- within, intra- and inter-company. Association can be shown in proportion, rate, or percentage and can evaluate company’s liquidity, profitability, and solvency. Liquidity ratios show company’s ability to pay obligations and fulfill needs for cash; profitability ratios show wellbeing and success for the certain time period; and solvency ratios show company’s endurance over the years.

When looking at the financial performance of a company, it is important to examine the financial ratios. There are several different classifications of financial ratios. Profitability ratios show the profitability of the company. Liquidity ratios deal with the current assets and current liabilities of the company, and they determine how the company is performing with their liquid finances. Leverage ratios deal with the company’s debt, and how they affect performance. Activity ratios deal with a company’s inventory and collection period, determining how well a company is able to turn over inventory and collect debts. The other important measures of financial performance include information on dividends, common stock, and cash flows (**Use

Results of data found that three ratios were decreasing gradually between 2013 and 2015. Particularly, the return on assets dropped rapidly in the areas of profitability.

The horizontal analysis reflects a significant increase in the company’s cost of goods sold between years 2 and 3 with only a modest increase in their sales for the same period. The balance of their expenses remains stable or decreased modestly during the same time period but gross profits declined due to the significant increase in cost of goods sold.

The table above shows that despite the increase in sales and number of employees, cash flow has fallen by more than half, profit from operations is down and profit for the year is even lower. There is no significant change in debt. The only bright figure is the capital expenditure which according to their strategy is as a result of expansion in other regions. (Annual reports, 2011 pg 2). The CEO’s statement that “The growth of Kesko's business operations strengthened in 2011 …Profitability improved” (annual reports, 2011 pp 6) suggest that there has been worse performance in previous years. A look at previous years’ annual reports will confirm that.

The analysis of the net income of the company shows that the net income increased by 11.20% in 2014 and reduced by 5.59% in 2015. This shows that the 8.31% increase in revenue in 2015 has been accompanied by a reduction in the net profit. The profit in 2015 however, remains to be higher than that of 2013. The reduction in net profit could be due to a greater increase in costs than revenue.

| Quarterly profit is 20% higher than the expected result whereas Return on investment is very low. It is recommended to slightly increase the prices of the services to reduce the gap of return on capital employed.

Similarly, a rise in Return to Assets ratio can be observed, however, it can be noticed that the ratio falls in the year 2008 and rises again in the year 2009. This shouldn’t be misinterpreted as it happened due to the increasing asset base of the company and not only decreased profits. Although certain unusual expenses (refer Note 1, Table 3) have been presented in the income statements of the firm in year 2008.

Ratio analysis is generally used by the company to provide some information on how the company has performed during that year, so that the parties involved including shareholders, lenders, investors, government and other users could make some analysis before making any further decision towards that particular company. As mentioned by Gibson (1982a cited in British Accounting Review, 2002 pg. 290) where he believes that the use of ratio analysis is such an effective tool to evaluate the company’s finance, and to predict its future financial state. Ratios are simply divided in several categories; these are the profitability, liquidity, efficiency and gearing.

Ratios analysis is the way to calculate the company operating and financial performance through profitability, liquidity, gearing, investing and activity ratio. According to business.com (2015) explains that ratio analysis determines trends and find out the strengths and weakness of the company. While calculating, data and information are compared with past ratios within the company and different company. After through study on data and information

The rate of return on total assets ratio expresses the relationship between net profit plus interest expense and total assets as a percentage. It shows the effectiveness of the business in relation to total assets.

The ratio analysis is a quantitative tool to analyze the financial statement of the organization. The ratios are widely used tool to know the performance of the company; each and every ratio is finally end up with the meaning full information related to the financial position of the organization. The ratios are also help to the financial analyst to interpret the financial statement to know the strength and weakness of the organization as well as historical performance and current financial condition can be determined along with the liquidity position of the company.