The paper "Financial ratios: Elmbank Ltd" is an outstanding example of a Finances & Accounting assignment. A current ratio of 1.85:1 means the business has enough liquidity to settle all its current liabilities. The company had enough current assets to pay off its debts. The value of the current ratio indicates a good financial strength of the company and the company was unlikely to run into financial problems (Gibson & Charles, 2012). Acid ratio Acid test ratio=current assets-inventory/current liabilities =4470-2470/2407 =0.831 In 2012, the company had too much of its current assets tied up in inventories and it was not in a position to pay off its short-term debts (Lee, Lee & Lee, 2000).
The company was cash poor. It means that it had to sell its inventories for it to settle its short-term debts. Cash ratio Cash ratio=cash+ marketable securities/current liabilities =0/2407 =0 The company had no cash in 2012. This means that it did not have enough assets in cash form to settle its debts. It had to depend on other assets. The company was therefore not financially sound. Debt ratio Debt ratio=total debt/total assets =15407/28278 =0.545 54.5% A debt ratio of 54.5% means that the company had more assets than liabilities and therefore depended less on leverage, that is, money borrowed from others.
The company had a stronger equity position meaning that there was less risk of it becoming bankrupt should all the creditors demand their money back (Babihuga, 2007). Debt-to-equity ratio Debt-to-equity ratio=total debt/total equity =15407/12871 =1.20 =120% The debt-to-equity of 120% implies that in 2012, the company had more investment from creditors than shareholders did. For every one dollar invested in the company by shareholders, there was a 1.2 dollars investment from creditors.
The company had a weaker equity position and based on this, it was not financially sound (Babihuga, 2007). This is because it did not have enough investment from shareholders that could pay off creditors. It means that for the company to settle all its debts, it had to sell some of its assets. Gross profit margin Gross profit margin=sales-cost of goods sold/sales =25000-13000/25000 =12000/25000 =0.48 48% A profit margin of 48% means that the company registered a profit of 48% on every dollar invested. This is a good indication because the company generated higher profits from the invested assets. Return on assets Return on assets=net income/total assets =1788/28278 =0.063 =6.3% The return on assets of 6.3% is low.
It means that the effectiveness of the company in investing is relatively poor. The profit earned from invested capital is low in the company. Return on sales=net income/sales =1788/25000 0.072 7.2% The operating efficiency of the company was low in 2012. A return on the sales value of 7.2% shows that the company is still not efficient enough in terms of how much profit is earned per dollar of sales (Lee, Lee & Lee, 2000).
However, a profit of 7.2% per dollar of sales is good enough to propel the company to financial growth. Return on equity Return on equity=net income/shareholder’ s equity =1788/12871 =0.14 =14% The profit on the shareholders’ investment was considerably high. This was a good indication especially to shareholders because it meant that they would get higher dividends from their investment. Operating efficiency Operating sufficiency=business revenue/total expenses =25000/23212 =1.08 In 2012, the company was self-sufficient. It did not depend on grants or any other funding for its operation. It could afford to offset all its expenses using the money earned through sales. SGA to sales SGA to sales=indirect costs/sales 9410/25000 =0.38 The low SGA to sales indicates that the company could control its overhead costs.
The overhead costs were not beyond the company’ s capability to handle. Operating expense ratio Operating expense ratio=operating expenses/total revenue 22410/25000 0.9 The company is efficient in its operations. This is because the operating expenses do not exceed the total revenue collected by the company. However, a value of 0.9 shows that the company spends much of its revenue on operating expenses.
Babihuga, R. (2007). Macroeconomic and Financial Soundness Indicators. Washington, International Monetary Fund
Gibson, Charles H. (2012). Financial Reporting and Analysis + Thomsonone Printed Access Card. South-Western Pub.
Khan, M. Y., & Jain, P. K. (2004). Financial management ; Text, problems and cases. New Delhi, Tata McGraw-Hill.
Lee, C. F., Lee, A. C., & Lee, J. C. (2000). Statistics for business and financial economics. Singapore, World Scientific Publ. Co.
Peterson Drake, P., & Fabozzi, F. J. (2012). Analysis of financial statements. Hoboken: John Wiley & Sons