Profit after tax (Net income)
- Calculation of ratios:
- 1. Rate of return on assets
|
A. Profit after tax (Net income) |
$4,362 |
|
B. Average total assets (Opening Assets + Closing Assets)/ 2 |
$28,990 |
|
(A/B) |
15.05% |
|
Industry Ratio |
22% |
- Rate of return on equity:
|
A. Net income available to equity shareholders (Profit after tax – preference dividend) |
$4,312 |
|
B. Shareholder’s Equity (Equity share capital + retained earnings) |
$14,215 |
|
(A/B) |
30.33% |
|
Industry Ratio |
4% |
(Bromwich and Bhimani, 2005)
- Profit Margin ratio:
|
A. Profit after tax (Net income) |
$4,362 |
|
B. Net Sales |
$55,000 |
|
(A/B) |
7.93% |
|
Industry Ratio |
4% |
- Earnings Per Share:
|
A. Profit available after preference dividend (Profit after tax – preference dividend) |
$4,312 |
|
B. Number of Equity Shareholders |
$7,200 |
|
(A/B) |
.60 or 60 cents |
|
Industry Ratio |
.45 |
- Price Earnings Ratio:
|
A. Market price per share |
$12 |
|
B. Earnings per share |
$0.60 |
|
(A/B) |
20 |
|
Industry Ratio |
12 |
- Dividend Yield:
|
A. Cash dividend per share (Equity dividend/ number of equity shareholders) |
$0.375 |
|
B. Market value per share |
$12 |
|
(A/B) |
3.13% |
|
Industry ratio |
5% |
(Deegan, 2013)
- Dividend payout ratio:
|
A. Cash dividend per share (Equity dividend/ number of equity shareholders) |
.375 |
|
B. Earnings per share |
.60 |
|
(A/B) |
63% |
|
Industry Ratio |
70% |
- Current Ratio:
|
A. Current Assets |
$12,745 |
|
B. Current Liabilities |
$5,780 |
|
(A/B) |
2.2:1 |
|
Industry Ratio |
2.5:1 |
- Quick Ratio:
|
A. Quick Assets (Cash & Cash Equivalents + Accounts Receivables or Total Current Assets- Inventory) |
$5,745 |
|
B. Current Liabilities |
$5,780 |
|
(A/B) |
.99 |
|
Industry Ratio |
1.3:1 |
- Receivable turnover ratio:
|
A. Net credit sales |
$55,000 |
|
B. Average accounts receivables (Opening receivables + closing receivables) / 2 |
$3,887.5 |
|
(A/B) |
14.15 |
|
Industry Ratio |
13 |
- Inventory turnover ratio:
|
A. Cost of goods sold |
$35,100 |
|
B. Average inventory (Opening inventory + closing inventory) / 2 |
$6,965 |
|
(A/B) |
5.04 |
|
Industry Ratio |
6 |
(Glajnaric, 2016)
- Debt Ratio:
|
A. Total Liabilities |
$15,720 |
|
B. Total assets |
$29,935 |
|
(A/B) |
53% |
|
Industry Ratio |
40% |
- Times interest earned:
|
A. Earnings before interest and tax (Net income+ Tax+ Interest) |
$7,830 |
|
B. Interest expense |
$1,560 |
|
(A/B) |
5.02 |
|
Industry Ratio |
6 |
- Asset turnover ratio:
|
A. Net Sales |
$55,000 |
|
B. Average Total Assets (Opening total assets + closing total assets) / 2 |
$28,990 |
|
(A/B) |
1.90 |
|
Industry Ratio |
1.8 |
- Analysis over the position of the company:
Company’s profitability position:
Profitability ratios are the technique to evaluate the profit position of the company. It is the best way to measure the performance of the company. Basically, it is the capacity of the company to make profit which is left after various cost and expenses. The profitability ratios are the operating margin, return on assets, return on equity etc. It is the main capacity of the company to earn profits (Higgins, 2012).
According to the ratios, it has been found that the operating margin ratio of the company is 7.93%, at the same time; the industry ratio is 4%. Thus, it could be said that the operating profit of the company is quite higher than the expectation of the industry and it express about the better performance of the company.
Further, return on equity depict about the returns which could be given to the shareholders of the company. Through the analysis, it has been found that the return on equity ratio of the company is 30.33%, at the same time; the industry ratio is 20%. Thus, it could be said that the return on equity of the company is quite higher than the expectation of the industry and it express about the better performance of the company (De Haan and Amtenbrink, 2011).
Lastly, the return on assets of the company depict about the total net profit in concern of total assets. Through the analysis, it has been found that the return on assets ratio of the company is 15.05%, at the same time; the industry ratio is 20%. Thus, it could be said that the return on assets of the company is quite lower than the expectation of the industry and it express about the less generated profit in concern of the total assets of the company.
Company’s liquidity position:
Liquidity ratios are calculated to analyze the liquid position of the company. These ratios express the short term debt obligations with the assistance of current assets of the company. The liquid position of the company could be measured through analyzing the current ratio and quick ratio of the company.
According to the ratios, it has been found that the current ratio of the company is 2.2:1 at the same time; the industry ratio is 2.5:1. Thus, it could be said that the liquid position of the company is bit lower from the industry and it is required from the company to enhance the current asset position of the company.
Further, quick ratio depicts about evaluation that how an organization could meet the short term financial liabilities of the company (Davies and Crawford, 2011). Through the analysis, it has been found that the quick ratio of the company is 0.99:1, at the same time; the industry ratio is1.31:1. Thus, it could be said that the quick liquid position of the company is bit lower from the industry and it is required from the company to enhance the quick asset position of the company.
Company’s financial gearing position:
Gearing position of a company depicts about the capital structure the risk and return position of the company. These ratios depict about the financial stability of a company in long term. These ratios of debt could be used to analyze and evaluate the gearing use of company. These ratios express about the company’s risk because of usage of excessive debt. The current debt ratio of the company is 53% and the industry ratio is 40% which is quite higher than the company’s debt ratio (Damodaran, 2011). This expresses that the financial risk of the company is quite higher and the organization is required to manage the debt position according to the industry to reduce the level.
- Analysis:
According to the case, a chef is always an asset for a restaurant as he or she contributes the economical and financial benefits to the company to enhance the performance and profitability of the business. Though, it is not easy for an organization to measure ad recognize the worth of a human assets. So, the valuation and the worth of the chef could not be recognized into the financial statement of the company. Every asset which offers the economical and financial benefit to a company is recognized by the CFO in financial statement of the company but only if the value of those assets could be measured (Bromwich and Bhimani, 2005). Thus the chef could not be recognized into the financial statement of the company.
- Indication of effects:
|
1 |
Statement of financial position |
Increment in noncurrent assets (equipment) |
|
|
Statement of financial position |
Reduction in Current assets (Cash) |
|
|
Statement of cash flows |
Reduction in cash flow |
|
2 |
Statement of financial performance |
Increment in income |
|
|
Statement of financial position |
Increment in current assets (accounts receivable) |
|
3 |
Statement of cash flows |
Reduction in cash flow |
|
|
Statement of financial position |
Reduction in current liabilities |
|
|
Statement of financial position |
Reduction in current assets (Cash) |
|
4 |
Statement of financial position |
Increment in current assets (Cash) |
|
|
Statement of financial position |
Increment in total equity (capital) |
|
|
Statement of cash flows |
Increment in cash flows |
|
5 |
Statement of financial position |
Reduction in current assets (accounts receivable) |
|
|
Statement of financial position |
Increment in current assets (Cash) |
|
|
Statement of cash flows |
Increment in cash flows |
|
6 |
Statement of cash flows |
Reduction in cash flow |
|
|
Statement of financial performance |
Reduction in expenses (Wages) |
|
|
Statement of financial position |
Reduction in current assets (Cash) |
|
7 |
Statement of financial performance |
Increment in expenses (Electricity) |
|
|
Statement of financial position |
Increment in current liabilities (Outstanding bills) |
|
8 |
Statement of financial position |
Increment in current assets (Cash) |
|
|
Statement of financial position |
Reduction in noncurrent assets (Equipment( |
|
|
Statement of cash flows |
Increment in cash flows |
|
9 |
Statement of cash flows |
Reduction in cash flow |
|
|
Statement of financial position |
Reduction in equity |
|
|
Statement of financial position |
Reduction in current assets (Cash) |
|
10 |
Statement of financial position |
Increment in current assets (Cash) |
|
Statement of financial position |
Increment in noncurrent liabilities |
|
|
Statement of cash flows |
Increment in cash flows |
References:
Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima publishing.
Bui, S.B.D., Petersen, T., Poulsen, J.N. and Gazerani, P., 2016. Headaches attributed to airplane travel: a Danish survey. The journal of headache and pain, 17(1), p.33.
Damodaran, A, 2011, Applied corporate finance,3rd edition, John Wiley & sons, USA
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
De Haan, J. and Amtenbrink, F., 2011. Credit rating agencies.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Glajnaric, M., 2016. The importance of dividend paying stocks. Equity, 30(2), p.6.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
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