The paper 'Financial Ratio Analysis of Elm Bank Ltd " is a perfect example of a finance and accounting case study. Ratio analysis is a comparison of the relationship between financial statements to help analyze the financial position of a business (Kerš uliene et al 2010). Ratio analysis needs careful analysis to prevent a company from going out of business. Ratio analysis helps to simplify the financial statements of a company. It helps in comparing different companies. Ratio analysis helps in trend analysis by comparing a particular company in a period.
It makes financial statement easy to understand. An investor can judge a company by looking at a few numbers instead of the complete financial statement. Ratio analysis helps the government in making policies (Petzke et al 2010). The government do this by collecting data from different to help them make policies on the policies. Ratio analysis is an important tool in a company because it helps in making various decisions. For instance, shareholders interested in investing in the company can use the information, for example, looking at return on investment ratios to make the decision.
Creditors can also use the ratios to decide on whether to provide services to the company (Cui & Ryan 2011). For instance, by looking at current ratio analysis a creditor will know whether the company is in a position to pay its debt or not. The information also helps the employees to know whether the company is in a position to give salary increments and incentives through profitability ratios. An analysis will show a ratio analysis of Elm bank Ltd between the years 2012-2013 and whether it is worth to invest in the company or not (Petzke et al 2010). 1.2 Profitability Ratios Profitability refers to business performance in making a profit with minimal costs. 1.2.1 Return on total assets (ROTA%) Return on total assets = Profit Before Interest Payable and Tax × 100 Total Assets (excluding Intangibles) 2012 2013 ROTA= 3500 × 100= 14.7%ROTA= 3780 × 100 = 14.87% 23808 25418 Interpretation: This ratio measures how the company is managing and efficiently using its assets to generate its profit (Peavler 2010) The ratio increased from 14.7% in 2012 to 14.87% in 2013. This was an increase of 0.17%. This increase implies that the company its assets efficiently to generate revenue (Peavler 2010) 1.2.2 Profit Margin Profit before Interest Payable and Tax × 100 Profit Margin= Sales 20122013 Profit Margin% 3500 × 100=14% 3780 × 100= 9% 25000 42000 Interpretation: It indicates how much earning is kept by the company for each dollar of sales it makes The ratio reduced from 14% in 2012 to 9% in 2013. This was a decrease of 5%.
This decrease implies that the company has no better control of its cost compared to the previous year (Peavler 2010) 1.2.3 Gross Profit Ratio Gross profit Margin = Gross profit Sales 2012 2013 12000 × 100 = 48%18900 × 100 = 45% 2500042000 Interpretation This ratio shows the sales available to help to offset expenses leading to net profit.
The gross profit decreased from 48 % in 2012 to 45% in 2013. A decrease of 3% indicates that the company sales are not sufficient (Petzke et al 2010). 1.3 Liquidity Ratios Liquidity ratios the ability of a company to get funds for its daily operations 1.3.1 Current Ratio Current ratio = Current Assets Current Liabilities 20122103 Current Ratio 4470 =1.86 times 7752 = 2.41times 2407 3213 Interpretation: 1. This ratio is used to gauge the company’ s quantity of its current assets to its current liability.
(Peavler 2010) 2. The ratio has increased from 1.86 in 2012 to 2.41 in 2013.
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