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Importance of Ratio Analysis

Ratio analysis is an important tool which is used for ascertaining financial performance of company. It is also used for analysing change in company’s financial situation. There are different types of ratios such as profitability, liquidity and efficiency ratio. All ratios are used for analysing financial performance by comparing with ratios of previous year. For outside investors ratio analysis is very useful as it is a medium of source of information for them. Issues related to profitability, liquidity, efficiency of operation are also evaluated by using ratio analysis.

Financial performance has been analysed by using various ratios such as profitability, operational, structure and per employee ratio.

Profitability ratio is mainly used in ascertaining the efficiency with which company is making profit from its operations. In other words, financial performance of company at end of financial period is measured by using profitability ratio. Profitability ratio shows how existing assets of company are utilised in achieving profit and also providing value to shareholder (Ball et al. 2015). Therefore, profitability ratio helps in measuring company’s ability in generating profit in relation to equity, operating cost and sales revenue and assets of balance sheet. On basis of calculation, it has been seen that return on shareholders in 2018 was 23.25 whereas in 2019 there was a decrease in ROE and in 2020 there was an increase in ROE. In 2021 ROE decreased to 17.13 which means company is not managing its operations efficiently and it is not providing any value to shareholders (Sha 2015). It also indicates that company is not efficient in generating profit. Return on capital employed in 2018 was 22.72 whereas in 2019 there was a decrease in ROCE and in 2020 there was an increase in ROCE. In 2021 ROE decreased to 17.13 which means capital resources of company is utilised effectively. Return on total assets in 2018 was 10.13 whereas in 2019 there was a decrease in ROTA and in 2020 there was an increase in ROTA. In 2021 ROTA decreased to 6.14 which means less earnings has been generated in more investment that is more amount has been invested in assets which have not generated any revenue growth. Profit margin in 2018 was 4.22 whereas in 2019 there was a decrease in PM and in 2020 there was an increase in PM. In 2021 PM increased to 4.53 which means more profit is earned by company from sales and company is operating efficiently. Gross profit margin in 2018 was 51.18 whereas in 2019 there was a decrease in GP and in 2020 there was a decrease in GP. In 2021 GP decreased to 45.43 which means less profit is earned by company from sales and company is not operating efficiently that is sales is not converted to profit efficiently.

Operational ratios are used for measuring current as well as short-term performance of organisation. This ratio also helps in analysing the efficiency with which the assets of company are utilised in generating profit (Patin, Rahman and Mustafa 2020). On basis of calculation, it has been seen that net assets turnover in 2018 was 5.38 whereas in 2019 there was an increase and in 2020 there was a decrease in assets turnover. In 2021 assets turnover decreased to 2.07 which means assets of company are not used efficiently that is company assets has not generated any revenue (Nofiana and Sunaris 2020). Fixed assets turnover in 2018 was 4.8 whereas in 2019 and 2020 there was a decrease in fixed assets turnover. In 2021 fixed assets turnover decreased to 2.95 which means company is not managing fixed assets efficiently and it also means that company has invested larger amount in non-current assets. Interest coverage in 2018 was 5.11 whereas in 2019 there was an increase in ICR and in 2020 there was a decrease in ICR. In 2021 ICR decreased to 14.42 which means company does not have much profit to meet its interest expense (Setiany 2021). Stock turnover in 2018 was 5.93 whereas in 2019 there was a decrease in ITR and in 2020 there was an increase in ITR. In 2021 ITR decreased to 4.85 which means inventory is hold for a long period of time which also means company is facing issues in product line. Debtor’s collection in 2018 was 2.13 whereas in 2019 there was an increase and in 2020 there was a decrease in debtor collection. In 2021 debtor collection increased to 3.88 which means company is not receiving payments from customers timely and it also indicates late payment by debtors. Creditor’s payment in 2018 was 14.7 days whereas in 2019 it was nil and in 2020 there was an increase in creditors payment. In 2021 creditors payment decreased to 36.81 days which means company is not paying its bills efficiently and it is also facing issues in retaining and generating cash.

Types of Ratios and Calculation Results

Structure ratio is used for analysing ability of debtor in paying current debt obligations without raising external capital. In other words, this ratio measures the efficiency with which company is utilising current assets to meet current liabilities (Cetina and Gleason 2015). On basis of calculation, it has been seen that current ratio in 2018 was 0.9 whereas in 2019 there was a decrease in CR and in 2020 there was an increase in CR. In 2021 CR increased to 1.56 which means company is meeting its current debt obligations efficiently. Liquidity ratio in 2018 was 0.17 whereas in 2019 there was a decrease in LR and in 2020 there was an increase in LR. In 2021 LR increased to 0.75 which means company is converting its assets quickly into cash and meeting its debt obligations (Dimyati, Supeni and Saputri 2021). Gearing ratio in 2018 was 2.32 whereas in 2019 and 2020 there was an increase in GR. In 2021 GR increased to 85.13 which means financial leverage is high in company which indicates debt in company is higher as compared to equity (Rahardjo, Bangun and Amalia 2020).

Per employee ratio helps in ascertaining historical change in ratio of company while comparing it against other company. This ratio also helps in measuring the efficiency in which employee is generating revenue for company. On basis of calculation, it has been seen that profit per employee in 2018 was 23910 whereas in 2019 there was a decrease and in 2020 there was an increase in profit per employee ratio. In 2021 profit per employee increased to 58701 which means company is efficiency utilising its resources and it also means company’s productivity is also higher. Turnover per employee in 2018 was 566643 whereas in 2019 and 2020 there was an increase in turnover per employee ratio. In 2021 turnover per employee increased to 1296155 which means company is generating turnover from its operations efficiently and company is effectively using resources (Li et al. 2021). Salaries ratio in 2018 was 6.68 whereas in 2019 and 2020 there was a decrease in salaries ratio. In 2021 salaries ratio decreased to 4.14 which means company is not generating turnover efficiently and companies is not utilising its employees effectively.

Conclusion

On basis of discussion, conclusion can be made that for measuring financial performance ratio analysis is considered as an important tool. On basis of analysis conclusion can be made that profitability position of company is not good as company is not earning profit from its operations hence, company needs to gives more focus on improving profitability position of company. Conclusion can also be made that operational ratio should also be given focus as company is not operating efficiently. On basis of structure ratio conclusion can be made that company’s liquidity position and per employee ratio is good whereas company needs to give more focus on improving salaries ratio. Hence, on basis of analysis conclusion can be made that for achieving growth and success and for carrying operations of company effectively company should improve profitability and efficiency ratio as improvement in this ratio will result in improving overall financial position of company.

(1)  

(2)

(3)

Financial statement is based on certain accounting concepts which includes (1) economic entity concept: in this concept personal transaction are not recorded as owners are separated from business (2) conservatism: in this concept revenue is recorded when it is known that it will be recovered in future period (Neag and Masca 2015) (3) going concern concept: in this concept assumption is made that revenue will be deferred to different period and assumption is also made that for long time period company will continue its operation (4) matching concept: in this concept expenses that are related to income are recorded in same period which in turn indicates that transactions are recorded fully (Kamal 2015) (5) accrual concept: in this concept preparation of financial statement is done on accrual basis which indicates transaction are recorded when they occur and when there is recognition of revenue. 

(1)

(2)

To,

Mrs Harma,

Date: 18Th Jan 2021

Sub: Analysis of cash flow statement

Cash flow statement is prepared for ascertaining amount of cash incurred by company in accounting period that is it helps in analysing how much cash is coming in company and how much cash is going out of company. Cash flow statement has three categories that is cash flow from operating, financing and investing activities. Activities used for generating net profit is considered as operating activities, activities related to investment in non-current assets is considered as investing assets and activities related to issuing of shares and debt or repayment of debt are considered as financing activities (Wild 2019). On the basis of analysis, it has been noticed that negative cash flow is generated from operating activities which means company is not having much cash for meeting its expenses. Positive cash flow is generated from investing activities which means cash is not invested in non-current assets for future and negative cash flow is generated from financing activities which means company has paid out its capital. On basis of findings, it has also been noticed that net cash is negative which indicates cash is not coming in rather it is going out.

Therefore, it can be concluded that cash flow of company should be improved as cash at end is zero. Cash position of company can be improved by timely sending invoices, increasing prices, operating expense revaluation and expansion in sales market. Hence, focus should be given on improving cash flow statement.

Sincerely,………..

Reference

Ball, r., gerakos, j., linnainmaa, j.t. and nikolaev, v.v., 2015. deflating profitability. journal of financial economics, 117(2), pp.225-248.

Cetina, j. and gleason, k., 2015. the difficult business of measuring banks’ liquidity: understanding the liquidity coverage ratio. office of financial research working paper, (15-20).

Dimyati, m., supeni, n. and saputri, k.d., 2021. the effect of liquidity ratio and profitability ratio on financial performance at unilever indonesia company. e-proceeding stie mandala, pp.140-144.

Kamal, s., 2015. historical evolution of management accounting. the cost and management, 43(4), pp.12-19.

Li, q., lourie, b., nekrasov, a. and shevlin, t., 2021. employee turnover and firm performance: large-sample archival evidence. management science.

Neag, r. and ma?ca, e., 2015. identifying accounting conservatism–a literature review. procedia economics and finance, 32, pp.1114-1121.

Nofiana, l. and sunarsi, d., 2020. the influence of inventory round ratio and activities round ratio of profitability (roi). jasa (jurnal akuntansi, audit dan sistem informasi akuntansi), 4(1), pp.95-103.

Patin, j.c., rahman, m. and mustafa, m., 2020. impact of total asset turnover ratios on equity returns: dynamic panel data analyses. journal of accounting, business and management (jabm), 27(1), pp.19-29.

Rahardjo, t.h., bangun, n. and amalia, t.h., 2020. effect of firm size, gearing ratio, and gender diversity on extent of risk disclosure. effect of firm size, gearing ratio, and gender diversity on extent of risk disclosure.

Setiany, e., 2021. the effect of investment, free cash flow, earnings management, and interest coverage ratio on financial distress. journal of social science, 2(1), pp.67-73.

Sha, t.l., 2015. pengaruh kebijakan dividen, likuiditas, net profit margin, return on equity, dan price to book value terhadap harga saham pada perusahaan manufaktur yang terdaftar di bursa efek indonesia 2010 –2013. jurnal akuntansi, 19(2), pp.276-294.

Wild, j., 2019. financial accounting: information for decisions, 9e.

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