For the purpose of giving the shareholder a fair view regarding the performance of the Firm, different analysis techniques can be employed. For the purpose of comparison I have employed ratio analysis technique as a principle method in analysing the company’s performance. Ratios expressed in this comparison have either been expressed as a percentage or as a quotient. In this way they are aimed at examining in detail the overall picture portrayed by the final statements to ensure that the equity shareholders i. e. the suppliers of the basic risk capital gets the information they need in terms of investment returns.
The same analysis would also be of a similar importance to the internal management as well as the company creditors. Horizontal AnalysisTurnoverFor the year ended 31st Dec 2004 the turnover was ₤10,490. This shows an increase using the turnover rate of ₤14,485 for the year ended 30.09.05. The difference is ₤3995. To Complete the Total asset turnover for the financial year for the year ended 31.12.04Total asset turnover = 10,490 = Sales 26,616 Total assets= 0.394For the year ended 30.09.05Total assets turnover = 14,485 41,710= 0.347Using the trend analysis to interpret the two ratios, the year ended 31.02.04 shows a better performance compared with the notion outcome of the year ended 30.09.05To conclude the profitability ratio by using the total asset turnover ratio of the Krypton ltd Company may not be final.
I would still expect to do some companies with other firms’ dealing with similar commodities that is inter-firm companion. This entails companion of this ratio for a number of different firms the same industry. Such attempt would facility comparative study of financial position and performance of the firms in the industry. In using this comparison, the most important fact to be taken care of in the variations of the accounting system changes in the policies and procedures of the firm. The targets of the krypton ltd co.
must also be taken into consideration. For the purpose of getting a fair and true view of the profitability of this company basing on the turnover ratio it is important to compare with the standard set. The best example of such standard is the 1:1 ratio which is to be considered a good ratio for analyzing acid –test ratio.
Acid test ratio relates liquid assets that are (current asset less stock) to current liabilities. i.e. Acid test ratio = Current Assent less stock Current liabilities. (This ratio of 1:1 is usually ideal and satisfactory)Cost of SalesThis is the cost incurred in order to deliver the art of order achieved. It shows how efficiently the firm is employing the available resources. (Edgar, 1989)For the year-ended 31.12.04 the cost of sales is ₤ 5,710. There is an increase in the cost of sales as shown in the P& L A/C for the year ended 30.09.05.
Using this information for the year ended 31st. 12 year 2004, is more profitable due to the less costs incurred. However to get picture of the performance, rate of turnover ratio is needed to be completed. Rate of stock turnover = Cost of sales