Essay: Ratio Analysis And Capital Budgeting Explanation And Examples.

Describe about ratio analysis & capital budgeting.
 

Net profit margin:

This ratio is expressed between the net income that has been earned during the period and the sales that have been earned during the stated period.

It is arrived at by dividing the net income by sales.

Net profit after tax/sales

2.0%

-8.4%

-24.0%

-11.9%

The above calculated net profit margin merely shows that the profitability of the company has though changed but still the company needs to work harder so that the company could earn more amounts of profits. The company was earning losses in the initial years under review but is now earning profits.

These are the amount of the earnings that have been earned by making an investment of the money in the various assets that have been employed in the business. The efficiency and the effectiveness of the company comes to light during the use of these assets and these are the returns that helps in the generation of the revenues for the company.

It is arrived at by dividing the net income by the average of opening as well as the closing balance of the total assets.

Net profit after tax/total assets

4.1%

-16.6%

-51.1%

-19.5%

The net profit that the company is getting after meeting all its expenses is coming out to be negative which shows either the expenses of the company are more or the sales of the company are too less that it is not able to cover its expenses. Hence, the company must look for the alternatives so that either the sales of the company could increase or the expenses of the company could be reduced. The sales could be increased by the way of offering discounts, advertising its products etc and the expenses could be decreased by the way of eliminating the expenses that are of no use and that are being incurred that are variable in nature.

It is a measure through which the company estimates the number of times the company collects the balance in the accounts receivables account.

It is arrived at by dividing the sales by the average of opening and closing accounts receivable. 

It is a measure that helps in ascertaining the extent to which the management is efficient in deploying the assets of the company in order to generate revenues.

It is expressed between sales and average assets during a year.

It is arrived at by dividing the sales by the average of opening and closing assets.

Sales/total assets

2.09

1.98

2.13

1.64

The above shows that the total assets turnover has increased over the time pans but even then there are measures that are required to be undertaken so that the company could improve even more.

The net profit that the company is getting after meeting all its expenses is coming out to be negative which shows either the expenses of the company are more or the sales of the company are too less that it is not able to cover its expenses. Hence, the company must look for the alternatives so that either the sales of the company could increase or the expenses of the company could be reduced. The sales could be increased by the way of offering discounts, advertising its products etc and the expenses could be decreased by the way of eliminating the expenses that are of no use and that are being incurred that are variable in nature.

Return on Assets

Current ratio is the measure that tells us as to what extent the current assets are able to pay off the current liabilities of the company.

It is arrived at by dividing the current assets by the current liabilities.

Current assets/current liabilities

0.16

0.15

0.26

0.20

The ratio has decreased which shows that the ability of the company to pay off the short term debts has reduced. The company must either pay off its short term debts or improve its inventories etc. it seems that the company is facing a cash crunch, it should either go for a loan or something that could improve its liquidity position. 

It is a measure to ascertain the extent to which the equity as well as the liabilities of the company is used to finance its assets.

It is derived by dividing the total liabilities by shareholder’s equity of the company.

Debt/equity

2.519393513

2.871366629

2.040303615

1.869405535

This shows that the assets of the company have been financed by the equity that belongs to the shareholders which is good since if the assets of the company are financed by funds of the debt holders, then the increased amount of interest has to be paid to them.

The equity ratio is the ratio which is the solvency ratio of the company which this shows that the assets are financed by the owners of the instead of the debt holders. It compares the total equity of the company with the total assets (Accounting course, 2016).

Equity/total assets

30.0%

27.5%

34.8%

36.9%

The above shows that this ratio has reduced which is not good for the company since it shows that the increased amounts of the assets have been financed using the funds of the debt holders.

This is the amount of the earnings of the company. The formula is to divide the total amounts of the profits by the total number of the ordinary shares that have been issued.

Net profit after tax/nos of issued ordinary shares

1.25

(4.75)

(54.62)

(400.82)

The above shows that the earnings per share were negative but now the earnings are positive but even the profits of the company are less and the company must work hard towards decreasing its expenses or increase the sales of it.

This is the amount of the dividend that the company pays per share to its shareholders.

Each shareholder expect something or the other on its investment. Hence, the more it is, the better it is for the company. 

This is the ratio that is expressed between the earnings per share of the company and the market price of the share.

Market price per share/earnings per share

12.53

(2.62)

(0.69)

(0.18)

The data shows that the ratio has improved which makes it more viable for an investment for the investors and which must be improved more since it would end up in attracting more investors that could prove profitable for the company.

ROE are the earnings that the company earns by investing the funds of the shareholder’s in the business. The more the return on equity, the better is the profitability of the business.

It is arrived at by dividing the net income by the average of opening as well as the closing balance of the shareholder’s equity.

Comprehensive Income/shareholders' equity

12.94%

-60.73%

-147.26%

-52.79%

Days of Inventory

The above shows that the net profit of the company has improved but even then there must be ways through which the net profits could be improved.

The net profit that the company is getting after meeting all its expenses is coming out to be negative which shows either the expenses of the company are more or the sales of the company are too less that it is not able to cover its expenses. Hence, the company must look for the alternatives so that either the sales of the company could increase or the expenses of the company could be reduced. The sales could be increased by the way of offering discounts, advertising its products etc and the expenses could be decreased by the way of eliminating the expenses that are of no use and that are being incurred that are variable in nature. 

The return on the net operating assets is the amount of the income which is generated when compared with the amount of the operating assets that are being used. The data used in the restated statements is very different.

Operating income after tax (OI)/net operating assets (NOA)

8.974928896

9.068876444

5.636199402

3.944212204

The above shows that the return on the operating assets have improved which means that the return has improved but even then there must be more ways through which the returns must increase more. I feel that the return on the net borrowing assets must be so that it can be equal to the amount of the interest that is being paid on the borrowing assets of the company.

Net borrowing cost (N.B.C) is a ratio that tells us how much interest the business is paying for the borrowed capital it has used to purchase its assets.

Net fin. expenses after tax/net financial obligations

33.09%

28.40%

53.16%

55.18%

The net borrowing cost has decreased which is goods since the company’s cost of interest on the borrowings has reduced which would in turn improve the amount of the net profits of the company.

It is the ratio that is expressed between the net income that is earned by a company and the sales that are affected during that period (Boundless, 2016).

It is arrived at by dividing the net income by sales.

The above calculated net profit margin merely shows that the profitability of the company has though changed but still the company needs to work harder so that the company could earn more amounts of profits. The company was earning losses in the initial years under review but is now earning profits.

The profit that the company is getting after meeting all its expenses is coming out to be negative which shows either the expenses of the company are more or the sales of the company are too less that it is not able to cover its expenses. Hence, the company must look for the alternatives so that either the sales of the company could increase or the expenses of the company could be reduced. The sales could be increased by the way of offering discounts, advertising its products etc and the expenses could be decreased by the way of eliminating the expenses that are of no use and that are being incurred that are variable in nature.

This is the ratio that signifies the ability of the company to generate the sales by using the assets of the company by the way of comparing the net sales with the average total assets (Accounting tools, 2016).

Sales/net operating assets (NOA)

8.72

9.79

7.28

4.47

The date above shows that the ratio has improved which shows improvement in the way the company is using the assets of the company but more efforts must be made so that this is improved even further. 

For the ratio analysis:

The ratios of the company shows an increase which shows efficiency on the part of the management and this merely indicates that the company is working hard in order to recover from the issues that it initially was facing. But even then, there must be more initiatives that must be undertaken by the company so that the company could improve some further.

The net present value of the company comes out to be positive with the rate of return to be 14%.

The investment proposed to be undertaken shows a positive net present value for the company which shows that the investment could be undertaken. Also, since the net present value is positive, the product could be undertaken without any hassle.

In case, the internal rate of return that is company wants comes tout to be 10% or less than 14%, then it would be wise for the company to accept the investment in this project since then the company would be in profit rather than being in losses.

But I think that the net present value for the company in case it invests in the project is too less, if it could be more, then it would have been great.

But even then if the company feels that this amount of return on that project is good, then the investment can be made in it without any hassles.  

References:

Difference between Economic and Accounting Profit. (2016). Boundless.

My Accounting Course. (2016). Asset Turnover Ratio | Analysis | Formula | Example.

My Accounting Course. (2016). Equity Ratio | Formula | Analysis | Example.