Financial ratios and performance analysis Sample Assignment

Statement of income for the year ended 31 December 2012

Statement of Financial Position at 31 December 2012

Pro-forma statement of income for the year ended 31 December 2013

Pro-forma statement of Financial Position at 31 December 2013

Note: Overdraft facility negotiated by Cameron amounting R10000 is not sufficient. Minimum overdraft facility to be negotiated should have been R10065.

Gross profit Percentage

For year 2012 = (126000/210000) x 100 = 60%

For yea 2013 = (175000/345000) x 100 = 50.72%

Earnings after tax percentage

For year 2012 = (43260/210000) x 100 = 20.6%

For year 2013 = (65380/345000) x 100 = 18.95%

Fixed asset turnover ratio

For year 2012 = (126000/250000) x 100 = 50.4%

For year 2013 = (345000/225800) x 100 = 152.79%

Debt to total capital employed

For year 2012 = (115000/270652) x 100 = 42.49%

For year 2013 = (70000/304687) x 100 = 22.97%

Return on net assets

For year 2012 = (75000/270652) x 100 = 27.71%

For year 2013 = (101200/304687) x 100 = 33.21%

Return on equity

For year 2012 = (43260/155652) x 100 = 27.79%

For year 2013 = (65380/234687) x 100 = 27.86%

Comment on financial ratios and performance analysis

The gross profit ratio shows the financial health of the company. If the gross profit ratio is higher, it indicates that the company is able to earn reasonable profit on sales as well as it is able to manage its cost of sales. It shows the profitability of the company. The gross profit ratio for the year 2012 is 60% whereas it reduces to 50.72% due to production and sale of new product.

Net profit ratio refers to the remaining profit obtained after deduction from sales all costs of production, financing, administration and income taxes. This ratio helps to consider the overall efficiency of the operation and performance of the business. It also indicates how well the trading activities of the company are performing. This ratio for the year 2012 is 20.6% which has been reduced to 18.95%. This reduction indicates that the manufacture and sale of new product has affected adversely on the financial performance of the company.

Fixed asset turnover ratio indicates the efficiency with which a company is generating sales from its existing fixed assets. The more the value of this ratio, the greater will the efficient use of fixed assets. This ratio does not say anything regarding the ability of the company to generate cash flows. This ratio has increased to 152.79% as compared to the year 2012 ratio of 50.4%. The increment in this ratio in the year 2013 indicates the company is using its assets more efficiency now i.e. around 3 times efficiently than the last year.

Debt to total capital employed is a measurement of the financial leverage of the company. The higher the value of this ratio, the greater will the risk of insolvency of the company. It is the liquidity ratio which indicates the proportion of debt which is used by company to finance its operation in comparison to its capital. This ratio was 42.49% in the year 2012 which shows the high risk of insolvency of the company. But it declines to 22.97% which represents the decline in the insolvency risk in the coming year.

Return on net assets is used as a measure to consider the financial performance of the company which takes the asset’s use into account. The higher the value of this ratio, the greater will be the efficient and effective use of the assets and working capital of the company. This ratio was 27.71% in the year 2012 which has increased to 33.21% in the year 2013. This increment indicates that the company is now managing its working capital and fixed asset more efficiently and effectively.

Return on equity measures the capability of the company to generate profit from the investment by the shareholders in the company. This ratio is also known as sustainable growth rate. This ratio was 27.79% in the year 2012 which more or less remained the same in the year 2013.

Suggestion to improve the financial position and future of CCC manufacturing

• The best way to improve financial position is to reduce the expenditure of the company. The company should observe every area of business and should find cheaper alternatives for supplies, equipments and services. For larger expenses the company should arrange deferred payments so that it can keep more cash at its hand.
• If the company increase the price of its product without losing its customers, the company may find that this is a good way in order to improve the financial position of the business.
• The company should improve the marketing of its product by considering all the latest marketing options as well as platform like, emails, video advertising, social media etc. the company may also use the service of debt collection agency in order to improve its financial position and early realization of trade receivables.