Financial Ratio Analysis Assignment On K.Pastry
Task: Students will be required to use the financial ratio analysis question available on moodle and in the subject outline.
Ratio analysis and report
The following information relates to the business of Chef One, and the owner is concerned about the profitability and financial structure of his business at 30 June 2018, especially since the bank is requiring repayment of the business’s overdraft.
Inventory at 1 July 2016 was $22 500.
(a) Calculate the following ratios for 2017 and 2018:
- profit margin
- return on proprietor’s capital
- current ratio
- quick ratio
- equity ratio
- inventory turnover.
(b) Write a report to the owner highlighting strengths and areas of concern in relation to the profitability, liquidity and financial stability of the business including recommendations to improve areas of concern.
(c) Identify the cash flow ratios that would be useful to calculate to assist K. Pastry to more fully understand the financial health of the business.
The financial performance of a business can be known through various parameters and one of the potent tools in the performance evaluation is ratio analysis. Ratio analysis helps in comparison of the items projected in the financial statements or the extracts as seen in the case of Chef one business. The ratio can endorse the business a better reply when it comes to various areas such as liquidity, profitability, efficiency, and solvency. The analysis is helpful to the outside parties however can serve a potent tool to the owner of the business to know how the business is performing. Hence, in this case, K.Pastry can understand the current scenario of the business with the aid of various ratios that pertains to different areas and can take a decision. In this report, the ratio pertaining to various segments is computed so that K.Pastry is able to understand the business structure from various angles and take a decision that will help in improving the areas.
The computation will further help the business in various mechanisms such as creating a trend line that will enable the business to know the movement of the business trend. This will lead to clarity and will help in estimating the financial performance. Moreover, this will aid in industry comparison that will enable the business to understand the present scenario (Davies & Crawford, 2012).
- Profitability ratio: The profitability ratio is computed that is the gross profit ratio to understand the ability of the company to make a profit with the capital it comprises of and the return on capital employed to help in tracing the profit that is generated (Melville, 2013). The profitability ratio can be used by the owner to check the margin of profit and ensure proper decision making whether to influx more money or not. As seen the gross profit margin of the company has declined in 2018 (29.9%) from a range of 34.7% in 2017. Hence, it indicates that the business had more expenses owing to which it could not attain the desirable figure. Moreover, there is a decline in the ROCE from 7.08% in 2017 to 3.7% in 2018 meaning that the business failed to utilize the funds.
- Liquidity ratio: Liquidity ratio helps in ascertaining the short term resources of the company and the ability by which the management can repay the short term obligations. Hence, coverage of the short term cash obligation is an essential consideration (Davies & Crawford, 2012). From the computation, it can be witnessed that the current ratio has dropped in the year 2018 from 4.8 times in 2017 to 3.9 times in 2018. However, this level of the current ratio indicates that the business comprises of huge cash level which can be used elsewhere to generate a return. Having a higher level of the current ratio indicates that the business is not able to use the surplus cash. Hence, the ratio should be curtailed to 2:1 that will ensure better prospects for the business. On the contrary, the quick ratio has fallen and is near to the standard ratio that is 1:1. It indicates that the business can meet the obligation without selling its stock. From the computation, it is clear that the business comprises of funds that can be used in an effective manner and the debts can be repaid on time. The inventory turnover for the company is based and hence, indicates that the company’s sales effort has been weak and the ratio is unable to meet the scenario
- Solvency: The solvency helps in stating a response to the long term viability of the company. It needs to be noted that the business should have a balance of equity and debt so that the business can function smoothly (Petersen & Plenborg, 2012). The equity ratio of the business indicates that the level of equity has declined yet the range is formidable. The present equity ratio stands at 72% meaning that the business is funded by 72% of equity and comprises of the low debt component. It stresses the fact that the business is not burdened by the level of debt.
Cash flow ratio
The operating cash flow ratio is the prime cash flow ratio that helps the business to understand and know whether the business is in a position to cover the liabilities from the cash flow from operations.
The operating cash flow ratio is one of the major cash flow ratios that indicate whether the money came in or moved out and the ability of the company in paying the bills. It is computed by dividing cash flow from operations with the current liabilities (Brigham & Daves, 2012).
If the ratio for the company or the business stands as discussed in the financial ratio analysis assignment lower than 1 then the company is not generating huge cash that will help in getting rid of the short-term debt that might be a serious problem (Leo, 2011). This is the ratio that will help K.Pastry in knowing whether the business comprises of sufficient cash to meet the short term debt.
From the above discussion in this financial ratio analysis assignment, it can be commented that the business of K.Pastry is operating under pressure because the profitability of the company is not strong as the business fails to utilize the capital in an apt manner. However, the liquidity of the company is formidable and this will help in meeting the obligations. Further, the equity presence is strong ensuring more emphasis on equity. Thereby, it can be commented in this financial ratio analysis assignment that the business is profitable but needs to pay attention to some key parameters to ensure a better business condition. Financial ratio analysis assignments are being prepared by our finance assignment help experts from top universities which let us to provide you a reliable online assignment help service.
Brigham, E. & Daves, P. (2012) Intermediate Financial Management. USA: Cengage Learning.
Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.\ Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
Melville, A. (2013) International Financial Reporting – A Practical Guide. 4th edition. Pearson, Education Limited, UK
Petersen, C. and Plenborg, T. (2012) Financial statement analysis. Harlow, England: Financial Times/Prentice Hall.