Ratio Analysis Of Capilano Honey Limited And Treasury Wine Estates Limited

Calculation of various ratios for Capilano Honey Limited

In this assignment two companies have been selected who are peers to one another and ration analysis of those companies have been done, to reach a feasible solution. The data has been extracted from their balance sheet and all-important ratios related to liquidity, profitability, earnings has been calculated and possible results have been stated. Ratio analysis is an important tool for financial statement analysis it helps in finding how the company is performing, by comparing the company with that of the industry standard and thus that helps in finding ways in which the company can change its situation. Ratios can be calculated analysed and interpreted. It is very important that good knowledge of the financials should be there. In case there are any issues and risk ratio analysis helps in finding the same and providing the company with the solution they deserve (Farmer, 2018).  It helps in comparison between two companies and thus investors can decide which company is better and where they should put in their money for better results. All the important ratios have been defined below and important calculation have been shown with effective interpretation. The main need of calculating ratios is to see which company is performing better and in what ways the company can improve. It is very important that timely updates must be there else the company would become Rundu ant and non-functional. There are various ways of analysing the ratios and financial experts can do that easily. Thus, people sort to compare with their peers based on these ratios so that they can make decisions based on factual data rather than on vague perceptions which might not be always correct.  The same has been done and analysed below.

Capilano Honey Limited:  The financial of the company have been take and analysed and important calculations have been calculated from that. The various ratios are based on different prospect that include finances, profitability, liquidity, overall earning etc. Each ratio has been explained, calculated and briefed below for the organization.

Calculation of various ratio of the Capilano Honey Limited

1. Net Profit margin ratio = Net Reportable Profit/ Net sales * 100

= 10334810 / 135217246 * 100

=0.076 * 100

= 7.6%

1. Return on equity (ROE) : – = Net income /  Equity share

= 10334810 / 9457481

= 1.09

1. Return on Assets (ROA)  = Net Income/ Total Assets * 100

= 10334810 / 96348883 * 100

= 0.1072* 100

= 10.72%

1. Return on invested capital (ROIC) = Net income – dividend / Total capital * 100

= 10334810 – 3782992 / 62331965 * 100

= 0.1051* 100

= 10.51%

1. Depreciation / PP&E (Property plant & equipment) Ratio = Depreciation / PP&E (Property plant & equipment) * 100

= 1598976 / 21236371* 100

= 0.075* 100

= 7.5 %

1. Current ratio = Current Assets /  Current liability

= 69837666 / 26619405

Analysis of the calculated ratios for Capilano Honey Limited

= 2.62

1. Quick ratio ;-

= Total Current Assets – Prepaid expenses – inventory / Total Current liabilities – Bank overdraft – Provisions

= 69837666 – 199896 – 44152632 / 26619405 – 3783238

= 25485138 / 22836167

= 1.11

Analysis of the above calculated ratio

1. Net profit margin ratio ;- Net profit margin ratio, In which ratio is calculated on the basis of net profit to revenue for the company or any business segment of the company, Basically this ratios calculate to express to know the how much net profit is eared by the company over the net sales of the company in a percentage term. That means how much revenue of the company translates into profit(Dichev, 2017). Net profit is the total amount of income that the company has earned over his expenses and hence it is an important aspect that companies needs to analyse feasibly and reach a conclusion. It is one of the most important profitability ratios.

Net profit margin is one of the most important ratios that company can analyse. This ratio plays very important part of any other financial measure of the company. It is important to understand this Ratio provide the earnings of company over the sales. It is calculated using income statement of company. Further Net profit margin ratio generally include non-cash item of the income statement of the company, this ratio does not include the non-cash item like depreciation. It very important to understand that change in accounting method plays the very important role to calculate the net profit margin ratio of the company.

Further This ratio shows that if net profit margin ratio is low that means it create the various issue of the company like inadequacy of management, inadequacy of customer and inadequacy of expenses. Net profit margin Low means company has unfavourable accounting method. Some company want to save the tax than such company should intentionally reduce his profit margin ratio. This ratio varies between companies and varies with industries also. i.e. High or low net profit margin ratio is compare between the companies in the similar industries (Kangarluie & Aalizadeh, 2017).

 In Present case company Capilano Honey Limited is having 7.6% net margin ratio that means company is earning 7.6% over the net sales of current financial year. This is generally very low ratio of profit earned.

1. Return on equity (ROE);- Return on equity means how much share holder can earn by investing their fund into equity share of the company.  Return on equity ratio shows the return on equity of the company. It is one of the most important earnings ratio that the company can follow to see how is it performing and delivering.

Investors generally prefer to invest in the company which have higher Return on equity (ROE). However Return on equity ratio is as a benchmark to compare the company between the similar companies of the industry. As company’s Profit and income varies into different levels significantly within the same sector of company. Return on equity will also vary into different levels of company, if company Plan to give the dividends rather than to keep the fund ideal, it result to increase the Return on equity of the company. Basically ROE will depend on dividend of the company if company provide the dividend that means company will earn higher ROE (Kuhn & Morris, 2016).

In the present case Capilano Honey Limited having ROE is 1.09 that means that for every 1 rupee of investment in Capilano Honey Limited, investors would generate Rs 1.09 In 1 stock , this return reflect the high value return of the Capilano Honey Limited . It means  that Capilano Honey Limited was newly started company and the company is in growing stage (Kangarluie & Aalizadeh, 2017).

1. Return on Assets (ROA):- Return on Assets means that company earn on their total Assets. It is calculated net income divided by total assets of the company, where Net income is derived from the income statement of the company and we consider profit after taxes for calculation. Where assets include cash and cash-equivalent items such as receivables, inventories, land, capital equipment as depreciated, and the value of intellectual property such as patents etc.  Further company have the “good will” which means extra money paid by the company as per the correct value derived at the time of valuation of goodwill. Since the Value of asset will increase and decrease over the period i.e.  An average of assets should be used over the period is consider for calculation of ROA.

Calculation of various ratios for Treasury Wine Estates Limited

In the present scenario company Capilano Honey Limited is having return on assets is 10.72% that means company can earn only 10.72% of their profit by utilising their resources. Basically, ROA is calculated by the company to compare the result between the similar companies and also to know the use of assets of the company. Company can do the cost benefit analysis i.e. company can analysis whether the existing assets are providing such economic benefit over its cost or not. It is a one of the important profitability ratio of the company (Heminway, 2017).

1. Return on invested capital (ROIC); –  Return on invested capital means how much return company can earn by investing their capital ROIC is the percentage amount that company is earning by investing on such project. It is also termed as   weighted average cost of capital return of the invested capital in the company. However, the ROIC is measured by the monetary value needed, instead of assets that were purchased. Therefore, we called Return on invested capital is consider the long-term debt and preference share i.e. equity share(Goldmann, 2016).

In the present scenario company Capilano Honey Limited is earning 10.51% over their invested capital that means. Company can manage the good return. Managing the good ROIC is more attractive to the potential customer.

1. Depreciation / PP&E (Property plant & equipment) Ratio: – Depreciation and plant property and equipment is calculated to Know  that how much depreciation is charged on the plan property of the company. Property plant and equipment are recorded at cost and depreciated over their estimated useful life of the assets. Depreciation is calculated by applying straight line method or Written down value method of the depreciable assets. Further treatment of Property plant and treatment is done as the manner prescribe by the international financial reporting standard (IFRS) or Generally accepted accounting standard.

In the present case Depreciation / PP&E (Property plant & equipment) Ratio of the company Capilano Honey Limited is 7.5% that means company can charge depreciation on their assets @ 7.5%. it reflects company’s assets are in good condition (Sithole, et al., 2017).

1. Current ratio; –  Current ratio of the company is a liquidity ratio, it reflect that company is able to pay their short term liability . The current ratio of the company mainly gives the idea of companies’ ability that company is sufficient to meet their Short-term obligation or not. As current ratio is calculating to know the rough idea about company’s current financial position. i.e. company’s working capital. The current ratios show the efficiency of a company’s operating cycle. Further Current ratios provide the idea that how fast the company can arrange the liquid cash to manage the day to day expenses. The current ratio is one of the major important financial ratios of the company which is help to investor to select the better company to invest.  It is helpful to  access the company risk factor also. Further higher the current ratio means company is more able to pay off their debt, their obligation at the earliest.

If current ratio is higher that means company have sufficient working capital that means company manage their day to day operation very well.

In the Present case Capilano Honey Limited having current ratio of 2.62 that means Capilano Honey Limited is able to pay off their short term and long term obligation very well, it is a good indicator for company. As per industry, standard current ratio is 2: 1 that means company have their current assets twice of their current liability. In present case Capilano Honey Limited current ratio is 2.62 that mean Capilano Honey Limited able to pay off their obligation.

1. Quick Ratio; – Quick ratio means company how quickly company is able liquidated their fund i.e. at what time company can convert their current ratio into cash that is called quick ratio. For the calculation of quick ratio, we deduct inventory or prepaid expenses from the total current assets. We deduct inventory because inventory of the company is not easily convertible into cash it will take some time to realise into cash. Prepaid expense is not considered because prepaid expenses are already paid for certain obligation of the company; hence it is not realising into cash. Further in total current liability we do not consider the bank overdraft and provisions because time of payment of bank overdraft is already decided or provision are made against certain assets that means it is not immediately payable, hence it is not considered for calculation of quick ratio(Chron, 2017).

In the present case Capilano Honey Limited quick ratio is 1.11 that means company is sufficient cash in hand to pay off their immediate obligation. Quick ratio 1.11 reflects that company is in a good condition.

Treasury Wine Estates Limited

Calculation of various ratio of the Treasury Wine Estates Limited

1. Net Profit margin ratio = Net profit after tax/ Net sales * 100

= 269900000 / 2571300000 * 100

=0.1049 * 100

= 10.49%

1. Return on equity (ROE) : – = Net income / Shareholder’s Equity

= 269900000 / 736766000

= .3636

= 36.6 %

1. Return on Assets (ROA)  = Net Income/ total Assets * 100

= 269900000 / 5279300000 * 100

= 0.051* 100

= 5.1%

1. Return on invested capital (ROIC) = Net income – dividend / Total capital * 100

= 269900000 – 184600000 / 3608500000 * 100

= 0.024* 100

= 2.4%

1. Depreciation / PP&E (Property plant & equipment) Ratio = Depreciation / PP&E (Property plant & equipment) * 100

= 99400000 / 1328500000 * 100

= 0.075* 100

= 7.5 %

1. Current ratio = Current Assets /  Current liability

= 1835200000 / 779300000

= 2.35

1. Quick ratio ;-

= Total Current Assets – Prepaid expenses – inventory / Total Current liabilities – Bank overdraft – Provisions

Analysis of calculated ratios for Treasury Wine Estates Limited

= 1835200000 – 0 – 0 / 779300000 – 112400000

= 1835200000 / 666900000

= 2.75

Analysis of above calculated ratio

1. Net profit margin ratio; – Net profit margin ratio is already discussed in above (point no. 1 of Capilano Honey Limited analysis). Further in the preset scenario Treasury Wine Estates Limited company  is having net margin ratio is 10.49% that means company is earning 10.49% over the net sales of current financial year. This is some good earning by the company.

1. Return on equity (ROE);- Return on equity ratio has been already discussed in above (point no. 2 of Capilano Honey Limited analysis). Further Treasury Wine Estates Limited

Is having Return on equity is 36.6% that means that for every 1 rupee of investment in Capilano Honey Limited, investors would generate Rs .366 In 1 stock , this return looks like a very low. This can imply that Treasury Wine Estates Limited was started recently and the company is not earning that much so that company can grow.

1. Return on Assets (ROA):- Return on assets ratio has been already discussed in above (point no. 3 of Capilano Honey Limited analysis). In the present case company Treasury Wine Estates Limited is having return on assets is 5.1% that means company can earn only 5.1% of their profit by utilising their resources. Basically, ROA is calculated by the company to compare the result between the similar companies and also to know the use of assets of the company. Company can do the cost benefit analysis i.e. company can analysis whether the existing assets are provided such economic benefit over its cost or not. It is a one of the important profitability ratio of the company(Belton, 2017).

1. Return on invested capital (ROIC): – Return on invested capital has been already discussed in above (point no. 4 of Capilano Honey Limited analysis). Here scenario Treasury Wine Estates Limited is earning 2.4% over their invested capital that means. Here Company cannot earn the good return for investor. Such kind of ROIC is less attractive for the investor(Alexander, 2016).

1. Depreciation /Property plant & equipment Ratio:- Depreciation vs. PP&E has been already discussed in above (point no. 5 of Capilano Honey Limited analysis). In the present case Depreciation / PP&E (Property plant & equipment) Ratio of the company Treasury Wine Estates Limited is 7.5% that means company can charge depreciation on their assets @ 7.5% it reflect company’s assets are in good condition.

1. Current ratio; – Current ratio is already discussed in above (point no. 6 of Capilano Honey Limited analysis). Here current ratio of Treasury Wine Estates Limited current ratio of 2.35 that means Treasury Wine Estates Limited can pay off their short term and long-term obligation very well which is a good indicator for the company. In present case Treasury Wine Estates Limited current ratio is 2.35 that mean Treasury Wine Estates Limited able to pay off their obligation.

1. Quick ratio: – quick ratio  is already discussed in above (point no. 7 of Capilano Honey Limited analysis). In present case Treasury Wine Estates Limited 2.75 that means company is sufficient cash in hand to pay off their immediate obligation. Quick ratio 2.75 reflects that company is in a good condition.

Overall analysis of both the company

1. Net profit margin ratio of Capilano Honey Limited and Treasury Wine Estates Limited is 7.6% and 10.49% respectively that means Treasury Wine Estates Limited is earning more than Capilano Honey Limited(Bromwich & Scapens, 2016).

Treasury Wine Estates Limited is better to invest.

1. Return on equity of Capilano Honey Limited and Treasury Wine Estates Limited is 1.09 and 36.6% respectively that means Treasury Wine Estates Limited not earn sufficient in comparison to Capilano Honey Limited.

In this scenario Capilano Honey Limited is better to invest.

1. Return on Assets of Capilano Honey Limited and Treasury Wine Estates Limited is 10.72% and 5.1% respectively that means Capilano Honey Limited provide more return in comparison to Treasury Wine Estates Limited.

Hence Capilano Honey Limited is better to invest.

1. Return on invested capital of Capilano Honey Limited and Treasury Wine Estates Limited is 10.51% and 2.4% respectively that means Capilano Honey Limited provide more return in comparison to Treasury Wine Estates Limited(Das, 2017).

Hence Capilano Honey Limited is better to invest.

1. Depreciation / PP&E (Property plant & equipment) Ratio of Both the company is 7.5%.
2. Current ratio of Capilano Honey Limited and Treasury Wine Estates Limited is 2.62 and 2.35 respectively that means Capilano Honey Limited have more liquidity in comparison to Treasury Wine Estates Limited.

Hence Capilano Honey Limited is better to invest.

1. Quick ratio of Capilano Honey Limited and Treasury Wine Estates Limited is 1.11 and 2.75 respectively that means Capilano Honey Limited have less liquidity cash in comparison to Treasury Wine Estates Limited.

Hence Treasury Wine Estates Limited is better to invest because Treasury Wine Estates Limited has more liquid cash than the Capilano Honey Limited.

Conclusion

After making the all over analysis it is recommended that Capilano Honey Limited is better to invest in comparison to Treasury Wine Estates Limited. It can be said based on these ratios whether the company is performing to the best of their abilities or not and are delivering good results to the management of the company. There are various ways in which these ratios can be interpreted and hence it is very important that there should be a hold on the overall functioning of the company. Ratio analysis has a lot of advantages which can be seen below, it helps in analysing whether the company is acting to the best of their ability or not and is delivering best results that it should base on its income statement and balance sheet. In case there are major any issues with the performance of the management same can be judged with the help of these ratios. The management can also use it to take important decisions with regards to the company and see which are the areas that are more prone to risk and will include extra efforts. Overall it can be said that it is one of the best measures to judge the financial performance of any company. Both the given companies have performed to the best of their abilities and have provided good results but one company is good in one aspect and other is good is one and that can be calculated based on the ratios of that company. In any case if there is any issue then companies can check their performance and analyse all the risk element and then decide what are the major changes they want for the growth of the company.

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