The paper "Financial Ratios Analysis of Brickworks" is a wonderful example of a report on finance and accounting. This report presents an analysis of the financial ratios of Brickworks limited. In so doing, five classes of ratios are used to exhaustively analyze the company. This can be seen in the appendix attached at the end of the report. The report also gives recommendations to both the internal and external users of financial information based on the analyses. It is hoped that the stakeholders will find the analysis useful in making various types of decisions. Introduction Business Ratio analysis is a useful tool in analyzing a company’ s performance.
Interpretation of such ratios is helpful in helping various stakeholders in making various types of decisions (Fernando, 2002). Such decisions may include investment decisions, financing decisions, and management decisions among others. This report uses ratio analysis to perform trend analysis on Brickworks limited. Brickworks Limited is a public limited company listed on the Australian stock exchange. The company is composed of a number of companies that specialize in the production of building products. The analysis is based on five classes of ratios which include analysis of profitability, liquidity, activity, leverage as well as the market value of its shares.
The report also gives recommendations based on the interpretation of the ratio. Rationale In order to adequately analyze Brickworks Limited’ s performance, it was necessary to divide the ratios into five groups which include liquidity analysis ratios, profitability ratios, activity ratios, leverage ratios, and market analysis ratios. By so doing all aspects of the company’ s performance have been adequately covered. This means that the needs of the insiders who include the management as well as those of outsiders who include creditors and investors among others have been adequately considered. Interpretation The company’ s liquidity Current ratio Brickworks limited had a current ratio of 3.308 in 2010 which dropped slightly in 2011 to 3.191.
This implies that for every dollar of current liability the firm had it had 3.308 and 3.191dollars of current assets with which it could meet the liabilities when they fall due in 2010 and 2011 respectively. The slight drop in 2011 can be attributed to the drop in the company’ s current assets during the year. Quick ratio Due to the nature of the company’ s business, its inventory may not be readily turned into cash in a bid to meet its current financial obligation.
Hence, the quick ratio was found a better means of analyzing the firm’ s liquidity. The company’ s quick ratio dropped from 1.9 in 2010 to 1.55 in 2011. The company’ s management is charged with the responsibility of ensuring that the company is able to meet its short-term obligations. Similarly, creditors need to assure themselves that the company will be able to meet its financial obligations before advancing any more financing to the company (James, 2010).
A good liquidity position for the company is therefore desirable by both the management and the creditors. However, although the company’ s liquidity is generally good being greater than 1 in both 2011 and 2010, the downward trend if sustained is not healthy for its performance. This is because the company may eventually not be able to meet its current obligations. This would lead to declining confidence by creditors on the company’ s ability to pay them and hence they may no longer be willing to extend credit to the company.
As such, most of the company’ s day-today operations may be hampered. Therefore, the company’ s management should come up with measures to ensure that the company’ s liquidity does not decline further so as to ensure the company’ s future success.
Fernando, A2002, Financial Statement Analysis: A Practitioner's Guide, New York, John Wiley.
James, S2010, Financial accounting, London, Rutledge.
Diana R2003, Corporate Financial Analysis: Decisions in a Global Environment. 4th ed, Chicago, Richard D. Irwin, Inc.
Jane, E2005, Advanced financial accounting, Melbourne, Longhorn publishers
Erich, B2007, Techniques of Financial Analysis: A Modern Approach. 9th ed, Chicago, Richard D. Irwin, Inc.