Using financial reports and accounts of your chosen organisation, analyse the results of the organisation highlighting trends in performance using appropriate and relevant ratios and analysis techniques.
Current ratio = current assets/ current liabilities
Current ratio is the simplest measure of a company’s liquidity. The current ratios for both 2011 and 2012 are less than 1, which is financially unfavourable since it means that the company is likely to experience difficulties paying its short-term dues. Furthermore, this current ratio is less than the industry average, which suggests that the company is having serious liquidity problems in comparison with related companies. The management of the company may want to contemplate a change of strategy, for example by reducing its current liabilities, to avoid landing into financial problems. The ratio has declined from 0.74 in 2011 to 0.73 in 2012, which could be attributable to leaner working capital cycle or deteriorating liquidity position (Bodie, Alex, and Alan, 2004; Damodaran, 2002).
Quick ratio = [cash and equivalents + short-term investments + accounts receivable]/current liabilities
Cash and equivalents
Unlike the current ratio, this ratio is more conservative because it does not include inventory from the current assets. This ratio further shows that Mark & Spenser is likely to have problems meeting its short-term obligations with its most liquid assets, especially considering the ratio is significantly below the industry average (M&S, 2012; Weston, 1990; Houston and Brigham, 2009).
Leverage against KPI
As discussed, the company’s leverage is unfavourable, but with the continuing efforts to build the company to become more international.ly focussed, with the sales expected to increase by 5.8% by 2013, the increased revenue can be used to offset the excessive shot-term debt. This will lead into a more balanced liquidity position, hence freeing the company from the risk of bankruptcy (Weygandt et al., 1996; HayGroup, 2006).
Solvency Ratio = [After Tax Net Profit + Depreciation]/ [Long Term Labialise + Short-Term Liabilities]
After Tax Net Profit
Solvency is used to measure the company’s ability to meet its long-term obligations. In other words, it measure’s the ability of the company to go on with meeting its debt requirements. The solvency ratio of 2011 was financially healthy, but that of 2013 was not healthy because as a general rule of thumb a ratio that is greater than 20% is considered financially healthy. It is discouraging to note that the company’s solvency ratio is dropping because this could expose the company to a situation of defaulting on its debt obligations (Gates, 2002).
Debt to equity ratio
Debt to equity ratio = Total debt/ [Owner’s Equity]
Debt to equity ratio
The debt-to-equity ratio indicates the degree of financial leverage that the company is using to improve its profitability. This ratio has increased to 61.8 from 57.3 in 2011, which may imply that the management should restrain use of additional increases in debt caused by purchases of fixed assets or inventory. The management can improve this ratio by either increasing the amounts of earnings retained in the firm pending the balance sheet date or by paying off a substantial portion of the debt. An example of doing this includes repaying of the planned bonus or by repaying the revolving debt before the balance sheet date, and if necessary borrowing it after the balance sheet date. In comparison with the industry average, it seems M&S is using too much debt in its capital structure, which is financially unhealthy as it can expose the company into risk of bankruptcy (M&S, 2012).
Total debt to total assets
Debt to equity ratio
Total debt to assets measures the proportion of an entity’s assets that are financed with borrowed cash. As a rule of thumb, a total debt to assets ratio of 0.5 is considered financially favourable, therefore, the company’s ratio for the two years are too low. The ratios of 0.36 and 0.38 for years 2011 and 2012 respectively indicates that the company is under using leverage, which is not recommendable since the company is not optimizing its investment opportunities. This ratio can be improved by borrowing more debts and invest it in viable business opportunities.
Solvency against KPI
In 2010, the company set out a target to increase its revenue by £1.5bn to £2.5bn over the subsequent three years. If this improvement is realized, the company can be able to finance its projects from the internal sources, hence stop over relying on debt because it is already overused (M&S, 2012)
Working capital management
Working capital turnover
Working capital turnover = sales/ working capital
This ratio measures the effectiveness in which the working capital is invested to generate sales. The working capital for this company is negative, yet the sales figure is very huge, it means that the management has invested it well to generate revenue.
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