Financial Ratio Analysis

On the basis of the Financial ratios (current ratio, quick ratio average collection period, inventory ratio and Net profit margin) for year ending in 2014 and 2015, explain the meaning of these ratios as well as what do these financial ratios mean to the investors. Explain what these financial ratio calculations tell about the overall health of the company.


Formula Year 2014 Year 2015 REMARKS
Current ratio current assets/current liabilities 1.552 1.63
Quick ratio Quick assets/Current liablities 1.506 1.61 Quick assets=current assets-inventory
Average Collection period Days*AR/Credit sales 67.57 days 59.65 days Average receivable=
Opening+closing receivable/2
Inventory ratio (in days) Average inventary*365/Cost of revenue 36.53 days 32.21 days Average inventory=
Opening+closing inventory/2
Inventory Ratio (in years) cost of revenue/average inventory 9.99 times a year 11.33 times a year Average inventory=
Opening+ closing inventory/2
Profit Margin net profit/total revenue *100 12.64% 17.65%

Financial Ratio Analysis

CURRENT RATIO

It tells the investors and creditors about the liquidity of the company and how easily will a company pay off its current liabilities.


It should ideally be 2:1,which is not the case the case; the company had a current ratio of 1.552:1 in 2013-14 while in 2014-15 it is 1.637:1. There is a slight improvement in the two years, which shows a positive trend and shows that the company’s assets have increased with respect to its liabilities.

QUICK RATIO

It is vital that a company has enough cash in hand to meet accounts payable and other bills when they come. The higher the quick ratio the more secure is the company in the short run. The ideal case is when the quick ratio is 1:1


The company has a quick ratio of 1.506:1 in 2013-14 and a ratio of 1.214:1. There is a slight decrease in Quick ratio, which shows that the company has decreased its cash in hand. And is moving towards the ideal ratio.

AVERAGE COLLECTION PERIOD

A shorter collection period means that receivables are being collected promptly and are being managed properly. But it is relative to how much credit term the company allows.


The average collection period of the company is 67.87 days in 2013-14, so if the credit term allowed by the company allows credit term of more than 68 days then the average collection period is good but if the average collection period is less than 68 days then the average collection period is worrisome. The average collection period was 59.65 days in 2014-15, which shows improvement in the collection period and means that the collection is happening faster.

INVENTORY TURNOVER RATIO (in days)

This shows how easily a company can sell its inventory. And it measures how efficiently a company controls its merchandise.


The company had an inventory ratio of 36.53 days and 32.21 days in 2013-14 and 2014-15 respectively, this shows improvement and means that the inventory is turning into sales faster.

INVENTORY RATIO (in times per year)

It shows the times per year the inventory is fully sold. The higher the ratio the more are the sales. The company had an inventory turnover ratio of 9.99 times in 2013-14 and 11.33 times in 2014-15, which means they are converting their inventory into sales faster in 2014-15.

NET PROFIT MARGIN

Net profit margin is an indicator of how efficient a company is and how well it controls its costs. The higher the margin is, the more effective the company is in converting revenue into actual profit.


The company had a net profit margin of 12.64% in 2013-14 and 17.95% in 2014-15. The Net profit margin has increased which means that the company has controlled costs better and has become more efficient.

Are you looking for help with Financial Accounting Ratios?

Financial Accounting ratios are an important tool used for financial statement analysis. Financial accounting ratios are a useful method for investors to know about the health of any business. These ratios are used to point out towards the liquidity, activity, efficiency and profitability of any business. All accounting, finance and business major students are expected to be aware of how to calculate financial ratios as well as how to compare financial accounting ratios and then to explain the significance of all these ratios. If you are an accounting/finance/business college student and are looking to learn everything about financial ratios, how to calculate financial ratios, as well as techniques to analyze financial statements based on financial ratio analysis, get in touch with online financial accounting experts from UrgentHomework who will guide you with all concepts of accounting. Learn all that you need to know about industry average ratios as well as how to compare any business’ health with financial ratio calculations.

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