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Analysis of the financial statements

University: Imperial College London

  • Unit No: 15
  • Level: High school
  • Pages: 13 / Words 3203
  • Paper Type: Assignment
  • Course Code: N/A
  • Downloads: 131
Question :

This sample will let you know about:

  • Discuss advantages of Ratio Analysis
  • What is liquidity ratio?
Answer :
Organization Selected : Gillette

The report is based on the hotel management company named as Gillette. The study will be presenting the financial analysis of the firm by making use of the ratio analysis tool so that profitability, liquidity and leverage position of the company could be assessed in an effective way. This tool played an important role with respect to making a comparative analysis fro the two periods in order to determine the trend. Though this tool is attached with various limitation like manipulation, estimated figures etc. so it cannot be used as an accurate and reliable measure.

Financial statement analysis is a practice of assessing financial information of an entity for the purpose of making appropriate decisions. External stakeholders uses it for understanding an overall organizational health and in evaluating financial performance and value of the business. The present report is based on Gillette Ltd which is seen as the hospitality company that is involved in managing the portfolio of the hotels in the United Kingdom and the Northern Ireland.  Furthermore, the study highlights computation of the ratios for making financial analysis and present liquidity, profitability and gearing position of the company. Moreover, the report describes uses or importance of the ratio analysis and the benefits & limitations associated with the ratio analysis tool. Get Assignment Examples.Talk to our Experts!

Trends of financial analysis

Liquidity analysis

It refers to the measurements that are used in examining an ability of an enterprise in paying off its current obligations (Kahn and Baum,  2020). The major liquidity ratios includes current and the quick ratio which depicts the liquidity position of the company in an overall market or an industry.

Gillette

Liquidity ratio

Particulars

Formula

2018

2019

Current assets

 

2325

2730

Current liabilities

 

990

752

Current ratio

Current assets/Current liabilities

2.35

3.63

 

 

 

 

Current assets

 

2325

2730

Inventory

 

700

900

Quick assets

 

1625

1830

Current liabilities

 

990

752

Quick ratio

Quick assets/Current liabilities

1.64

2.43

Interpretation- The above results generated reflects that over the years the current and quick ratio of Gillette Ltd is increasing which means that its liquidity position is getting better. This shows that Gillette Ltd is making an effective and efficient use of the current assets in order to meet its short term obligations. In the year 2018, the current ratio accounted as 2.35 which is been stated as an ideal ratio where the assets are seen as doubled the current liabilities which in turn counted as an ideal liquidity state of the firm. Moreover, the current and the quick ratio of the company is rising which clearly states that an enterprise is having adequate cash in meeting its current liabilities.

Profitability analysis

It is the measure that is been used by the company for gaining useful insights towards the financial well being and the performance of the business (Bhardwaj and Gupta, 2018). It includes gross profits margin, net profit margin etc. It helps in evaluating an ability of the firm for generating income against an expenses and other types of the cost attached to generation of an income.

Gillette

Profitability ratio

Particulars

Formula

2017

2018

Net profit

 

4333

4880

Net sales

 

5800

6500

Net profit margin

Net profit/Net sales*100

74.71%

75.08%

 

 

 

 

Gross Profit

 

5400

5900

Net sales

 

5800

6500

Gross profit ratio

Gross profit/Net sales*100

93.10%

90.77%

Interpretation- The above table reflects that the net profit margin of Gillette Ltd is rising from one period to another. This indicates that the firm is generating higher profits after making payment of all its costs, expenses and taxes. This in turn states that the company is performing better with passage of one accounting period. On the other hand, the gross profit margin is seen as declining over the period that is from 93% in the year 2018 to 90.77% in the year 2019. It clearly depicts that cost of sales is increasing which results to decrease in the profits. This also reflects that company need to focus on controlling the expenses that are incurred in relation to sales for improving its gross margin.

Leverage or Gearing analysis

It means the amount of the debt that is incurred for investing and obtaining higher return (Kim and Im,  2017). It shows the financial position or state of an entity in the market with respect to creditworthiness.

Gillette

Solvency ratios

Particulars

Formula

2017

2018

Long term debts

 

200

200

Total assets

 

5325

6730

Current liabilities

 

990

752

Capital employed

Total assets-Current liabilities

4335

5978

Gearing ratio

Long term debts/Capital Employed

0.05

0.03

 

 

 

 

Debt

 

200

200

Equity

 

802

898

Debt equity ratio

Debt/Equity

0.25

0.22

Interpretation- As per the results generated it has been analyse that gearing ratio of Gillette Limited accounted as 0.05 in 2018 and 0.03 in 2019. It is the ratio that reflects financial risk towards which business organization is subjected as excess of the debts could leads to the financial difficulties. Higher the gearing ratio, higher is the proportion of the debt to an equity whereas the low gearing ratio represents lower risk as proportion of the debt is less than equity. As the above results shows that the gearing and the debt equity ratio of Gillette Ltd is decreasing from one period to another which means that firm is capable of meeting its debts against its equities and depicts a better leverage position. Order assignment help from our experts!

Efficiency analysis

It is referred as the measure which states an ability of the corporation in using and managing its liabilities in an effective way in present period or in short term (Mohn and et.al., 2017). It measures time that is taken by an entity for generating the cash or an income from the customers or by way of liquidating an inventory.

Gillette

Efficiency ratio

Particulars

Formula

2017

2018

Cost of goods sold

 

400

600

Average inventories

 

700

900

Inventory turnover ratio

COGS/Avg. Inventory

0.6

0.7

Interpretation- The above evaluation shows that an inventory turnover ratio resulted as 0.6 and 0.7 in 2018 & 2019. Higher the ratio indicates that an inventory is fast moving while lower ratio states slow moving inventory or obsolete items in stock. The ratio that lies between 4-6 is stated as ideal but as Gillette is having low ITR, it means that it is maintaining excessive inventory which is not needed. This shows that an efficiency position of the firm is not good and it must look for maintaining optimal inventory for improving its ITR.

Knowledge generated from ratio analysis

Ratio analysis is counted as the most useful tool for an organization for analysing the financial, position, profitability, liquidity, risk, operational efficiency and in making proper use of the funds. It also indicates in making trend analysis and comparison of the financial information or results which would be helpful in making decision for an investment by the company's shareholders. The uses and significance of the ratio analysis are as follows-

Analysing financial statements- With helps of the ratio analysis, an entity could be able to interpret the items or the numbers from balance sheet and an income statement (Khalyasmaa and et.al., 2016). Each and every stakeholder is having different interest in respect to results from financials such as equity investors shows a keen interest in company's growth and its earning power in long period. However, creditors would ensure that they would be getting their repayments on time.

Helps in measuring performance of an entity- Profitability ratios helps in determining an ability of the company in generating earnings. For example- return on equity reflects an earnings generated by the firm in respect of equity. Gross and the net profit ratio enables in analysing an ability of the company in translating sales to the profits.

Assessing operational efficiency- Ratio analysis helps in identifying the degree to which the firm is efficiently working its business operations. Such ratios includes inventory turnover, asset turnover etc (Andjelic and Vesic,  2017). These type of ratios could be compared with other peers of similar industry and in analysing which type of firm is managed in a better way in comparison to other. It measures the capability of the company in generating income with the use of its current and non-current assets.

Liquidity of an entity- Ratio analysis is the main tool that helps in determining capability of the firm in paying off its current obligation. Through the current ratio, quick ratio, working capital ratio etc company can assess its liquidity condition in a better way.

Identifies business risks- Ratios helps in understanding business risk within the firm. It reflects the sensitivity of the an entity towards profitability with respect to deployment of the fixed cost and outstanding debts.

Helps in determining financial risk- The other major use of ratio analysis tool is that it enables in determining financial risks. Ratios such as leverage ratio, ICR etc assist the company in understanding the extent to which it is dependent on an external capital and it is capable in repaying its debt by making use of the own capital.

Planning and forecasting- Financial ratios are the tool that shows the trend which the manager uses in order to forecast the future and could be used for the purpose of making important decisions fro the stakeholders (Dong and et.al., 2016). Investors can make suitable decisions by using this tool in respect of making the investment in the particular proposal or not.

Comparing performance- ratio analysis is mainly used fro comparing the strengths and the weaknesses of the firm. It could be used for comparing previous ratios of the company and helps in analysing the progress made by an entity.

Benefits and the limitation of using the ratio analysis in making decisions within tourism industry

Ratio analysis is quantitative method of identifying the insights about the financial health and position of company. It is used for assessing the liquidity, profitability and operational efficiency. Ratio analysis is used as the tool for assessing the financial performance of the business. There are several types of ratios which are used by the organisations and experts for decision making. The historical data about the company or companies are compared to know the position of company (Campbell and et.al., 2019). They are used in analysing of financial statements by computing the values in percentage rather than comparison of the line items in financial statements. Struggling with your dissertation, get law dissertation topics from our experts!

Advantages of Ratio Analysis

It is useful in the analysis of financial position.

Accounting ratios are mainly computed for revealing the financial position of the company. It helps banks, financial institutions, investors  and insurance companies in making decisions related to lending and investments. This provides the investors internal and external position of company as compared with other entities and organisations.

Useful in simplification of accounting figures

Financial ratios helps in simplifying, summarising and systematizing accounting and financial figures for making them understandable for the decision makers and in lucid form. These ratios highlights the inter relationship existing between the different segments of business as represented by the financial statements (Easton and Sommers, 2018). Most often figures alone are not capable of conveying the meaning, but the rations enable them in relating them with the other figures.

Useful in assessing Operational Efficiency

Financial ratios helps organisation in getting an overview about the working of the concern. Investors finds the efficiency of the business to be more effective and evident when the analysis is based over the accounting ratios. These ratios are used for diagnosing the financial health of the organisation by evaluation of the profitability, liquidity and solvency and many more. It helps the managers and executives in assessing financial capabilities and requirements of the business units.

Useful in future forecasts

When the accounting ratios are calculated for more than two years a business trend can be obtained. The trend helps the management in setting the plans for future operations and making forecasts. Example ; sales expenses against the sales could be forecasted easily on the basis of figures of past years.

Useful in locating the weak points of Business 

These financial ratios play a great role in assisting and identifying the  weak points of Hotel even when the overall performance is good. Weakness in the financial structures because of incorrect policies could be identified easily by the accounting ratios (Aman,  2016). This helps in taking corrective steps about the company on time.

Limitations of ratio analysis

  • It is a complicated process to analyse the financial statements.
  • There are various companies working in different enterprises with each possessing their own environmental positions like, regulations, market structure etc,. These factors have importance as comparison between the organisations from different industries may be ambiguous.
  • Financial data have influence of the views & hypotheses. The accounting criteria lay different methods for the enterprises, that reduces the comparability of financial statements and this makes ratio analysis ineffective in such circumstances.
  • The financial ratios provide for the association between the data of previous years where the investors or users of financial statements are more concerned with the current and future data (Bragg,  2018).
  • These ratios do not consider the changes in pricing factors due to the inflations. They are calculated over historical costs and price level changes are ignored between periods.

Conclusion

By summing up the above report ratios analysis helps in making the comparative analysis of the present with the past periods. It helps in analysing the trend of performance and the position of the company.

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