Financial Ratio Analysis

Financial statements are the documents of any company or organisation which gives the clear picture of the historic financial statements (Preve, 2011). The financial document includes all the details and the accurate assets and the liabilities such as income, expense and the cash flow. Financial statement help to communicates with the investor and give them the detail of the company where the company stands and tell them the economic history performance and the future planning and decision making that what decision they can take (Lazaridis, 2011). Financial statement is based on the three main things which are given below

Balance sheet

Income sheet

Cash flow sheet

These are steps which help to make the financial statement and it will in the decision making for the managers.

The source of the business finance is the investor does some investment in the company this is the source of finance to the company (Garcia-Teruel, 2011). There are two kind of finance internal and external finance. When the business is well established and there growth is good and the company capital will also increase by retaining the term of profit that the business earns. This is called internal source of finance. There are external source of finance also in which if the company go for expansion and they don’t have sufficient internal source of finance then they use external source of finance (Gill, 2013).

Ratio Analysis for two Years (Published accounts as Example)

Financial ratio analysis is the selection, interpretation, of financial data along with other pertinent information, to assist in investment and financial decision making (Emery, 2011). It is also used internally to evaluate issues such as employees performance, the efficiency of operation and credit polices and externally to evaluate the potential investment and the credit worthiness of borrowers, among other things. The ratio analysis play very important role the organisation by using the ratio analysis the company know its position and where they stand. Making of financial statement balance sheet plays very important role in the organisation (Bougheas, 2009).

A statement prepared with a view to measure the exact financial position of a business on a certain date. All the assets and the liabilities of the company are clearly shown in the balance sheet. Balance sheet tells us clearly that what are their Capital, Current Assets, Current liabilities, Long term liabilities, short term liabilities, Fixed Assets (Deloof, 2010).

I have chosen the company Tesco for my assignment. Tesco is a giant in the UK super market and it is at the No.1 position. There is two years financial statement of Tesco 2010 and 2011.

There are six aspect of operating performance and financial condition and it can be calculate the financial ration (Bastos, 2012).

Liquidity Analysis Ratio

Liquidity ratio analysis are the short term debt which is rapidly converted into cash. Every organisation has those short term assets which will easily converted into cash and help the company. Here are some formulas to find the liquidity analyses ratio of Tesco (Berry, 2010).

Current Ratio = Current Assets/Current liabilities

= 11392/4250 = 2.68

= 11438/5862 = 1.95

Quick Ratio = Quick Assets/Current liabilities

= 8663/4250 = 2.03

= 8276/5862 = 1.41

Quick Assets = Current Assets-Inventories

= 11392-2729 = £8663M

= 11438-3162 = £8276M

Net working Capital Ratio = Net working Capital/Total Assets

= 7142/14681 = 0.48

= 5576/16623 = 0.33

Net working capital = Current Assets-Current Liabilities

= 11392-4250 = £7142M

=11438-5862 = £5576M

Interpretation of liquidity ratio

In year 2011 the current ratio of Tesco has remarkably fallen down at 1.95 as compare to previous year in 2010 it was 2.68. The main reason for decrease in current ratio is due to increase in current liabilities. If we see the figure in 2010 the current liabilities were £4250 and in 2011 current liabilities are £5862 which is 16 % more. If we breakup the current liabilities the main increase is trade and other payable which increased 10%.

If I analyse the quick ratio I will that quick ratio are decrease by 1.41 in 2011 as compared to year 2010 which was 2.03. There are two main reasons for this decrease in 2011. Quick assets decrease by 3%, the major decrease in cash and cash equivalent which is decrease by 10%. The second reason is current liabilities is increased by the 16%.

To find the net working capital ratio of Tesco in 2011 has fallen down at 0.33 as compare to the year 2010 which was 0.48. There are two effects in this ratio first is decrease in net working capital and the second is increase in total assets. The reason for decrease is increase in current liabilities for the net working capital. The second major reason for the increase in total assets in 2011 it is 19% more

Profitability Analysis Ratio

Profitability ratios also (refers to as profit margin ratio) compare content of income with sales. Profitability ratios give the new ideas to the company to increase their sales. This ratio is used for external Investors, Bankers and borrowers. Profitability ratio for the company can be calculated by these formulas.

Interpretation of profitability Analyses ratio

In year 2011 return of assets was slightly increase 0.057 and in year 2010 it was 0.051. There are two main factors of increase in return of assets in 2011. There is net income which was increase to 3% in 2011. The increase of 3% of net income in 2011 there are two main factors for the increase of net income. Revenue excluding the VAT increase 40% in 2011 and the second major factor cost of sales which increase to 35% in 2011. These are the main changes which make the cause to increase in net income. The average of total assets increase in 2011 about 8%

Return of equity in 2010 is 6.23 and in 2011 there is slightly increase in 6.66. There is 0.0043% increase in return of equity. Net income has increase to 3% of the Tesco. And on the other hand the average stock holder equity has increase to 0.26% in 2011.

Tesco profit margin was 0.041 in 2010 and now it is 0.043 as compared to last year it increase slightly. Net income and sales are increase in 2011 net income was increase to 3% and on the other hand sales which has a major affect on the profit margin and the sales has a sharp rise to 40% in year 2011.

In year 2010 Tesco earns per share 0.29P and now in 2011 there prices for the share has slightly increase 0.33P per share. The number of common share outstanding has 0.61%.

Activity Analysis Ratio

Activity analyses ratio use to measure how well the assets are being used in the organisation. These activity ratio help to put more investment in work for example Equipment and machinery etc. Activity ratio has four important parts.


Interpretation of activity analyses ratio

In year 2010 assets turnover is 1.24 and in 2011 it is increase to 1.30. There are two major factor of increase in ratio sales and average total assets.

If we will compare the sales of 2010 and 2011 there is a major rise of 40% in 2011 and it has a huge impact on the assets turnover. There is another reason average of total assets has been increase 8% and in the average of total assets there is 10% increase in non current assets as compare to previous year.

Tesco accounts receivable turnover in 2010 was 30.87 and there was slightly fall on 29.00 in 2011 and the accounts receivable slightly goes down by 0.0187%. There are two main reason for the accounts receivable turnover ratio one is the cost of sales which has increase of 35.68 and the another reason is.

Capital Structure Analysis Ratios

Published by MALI

Writer is post-graduated in Computer science, Business Administration, Marketing and Innovation. He has 10 years of business academic research writing experience.

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