The paper "Financial Ratio of Warratah Bank " is a finance and accounting case study. A financial ratio is a relative magnitude of two financial numerical values from an accounting entity in their financial statements. These ratios are used to indicate the performance of a firm, compare such firms with others in the industry and help poor-performing firms to take corrective action. This report enables Warratah bank to come up with an informed decision as to whether to finance Balloons limited or not. In this report, the profitability, liquidity and the stability of the firm are scrutinized using the financial ratios.
These ratios are available for the three year period that it has been in operation. The bank also uses other relevant data provided by the firm. The recommendation of the report, however, has been mostly based on the ratio analyses. Financial ratios are subject to a number of limitations which have been discussed in the report. This, therefore, implies that the weaknesses in the financial ratios have also been reflected in the decision of the bank regarding advancing the loan to Balloon limited. Profitability The return on assets has increased significantly over the three years.
This is attributed to the steady growth in the operating profit as well as the decrease in the interest expense over the years. The increase in the number of average total assets should reduce the return on assets but this is overwhelmed by the significant growth in the profit over the three years. However, the relative increase in the return has reduced over the three years. During the second year it grows by 43.1% while during the third year, it only increases by 13.3%. The return on ordinary shareholders has grown for over three years.
This signifies growth in shareholders wealth. This is greatly attributed to the growth in profit after tax. The ordinary shareholder’ s Equity has also increased over the 3 years (Clyde and Stickney, 2008). This may be attributed to the issuance of more shares or due to sharing splits. Although there is an increase in the ordinary shareholders' growth, the increase is retrogressive, in the year 2010 it grows by 47.7% while in the year 2011, it grows by 16.1% This trend is also the same in the earnings per share which have increased over the three years.
Just like the ratios discussed above, there is a retrogressive rate in growth. The dividends, as well as the dividend payout, have increased slightly over the two years where information is provided.
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