Analyse the accounts and investments statistics of OSU PLC and comment on the financial structure and current position of the company?

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1. Analyse the accounts and investments statistics of OSU PLC and comment on the financial structure and current position of the company?

 

Answer

Ratio analysis is an important tool of financial analysis. The absolute accounting figures do not provide any meaningful information for the purposes of analysis of financial performance and financial position of the firm. But when two relevant accounting figures are co-related, this gives some meaningful understanding with regard to financial performance.

Profitability ratio:

These ratios are designed to highlight the end results of the business activity. They measure the operating efficiency or profit earning capacity of the company.

Net operating profit ratio = net operating profit  * 100

                                                  sales  

2000                                 2001                                 2002

185/1600*100 = 11.56%  190/1800*100= 10.55%            150/1775*100= 8.45%

Operating ratio = cost of goods sold + operating expenses/sale *100

2000                                 2001                                        2002

1415/1600*100= 88.43 1610/1800*100= 89.44         1625/1775*100=  91.55

Comments:

As per calculations net profit ratio is falling every year and this declining trend is showing companies less capacity too bear any fall in sales it may happen also due to expenses related to sales have been increasing also the operating ratio is increasing. As per the investment statistics of the osu plc share price is falling i.e. From rs.230/- in year 2001 to rs.85/- in year 2002.low share price means less credit worthiness of the company in the market and again it will lead to less investment in shares, less availability of funds, more of borrowed funds, more risk involved in business. So current status of the company is more risk involved, as debts are more than the shareholders funds. And also liquidity position is also not so good, net profit is decreasing, working capital is nil, and costs are increasing. So company is facing financial distress.

2. Liquidity ratios:

These ratios measure the ability of the firm to meets it short term obligations and reflect the short-term financial strength. It indicates the capacity of the business to pay its current liabilities as when they fall due for payment.

Current ratio =    current assets                                

                           current liabilities

2000                                  2001                               2002 

417/505=0.83             430/611=0.70                500/623=0.80

Quick ratio =              quick assets

    current liabilities

2000                                 2001                                 2002

152/505= 0.30                   153/611= 0.25                          215/623= 0.34

Comments:

Low current ratio shows poor liquidity position and short term solvency of the company because it is below the ideal current ratio i.e. 2:1 as the quick ratio is less than 1:1 it indicates that inventory level is high or bank credit is low.

Capital structure ratio:

These are calculated to know the long-term financial position of the company. They measure the contribution of financing by owners compared with the financing provided by outsiders.

Debt-equity ratio = long term borrowings/equity

2000                                 2001                                 2002

300/200=1.50         232/200=1.16                 197/200=0.98

Fixed assets ratio = fixed assets/long term funds

2000                                2001                                2002

743/1093=0.68         811/1052=0.77                 850/1042=0.81

Comments:

Normally debt equity ratio of 2:1 is considered satisfactory. Higher the owner’s contribution, lower will be the financial risk and vice versa. But in this case shareholders fund are less than the long-term liabilities so there is more risk involved. The ratio should always be less than 1 and 0.67 is considered satisfactory.

Turnover ratio:

These ratios are intended to measure the effectiveness of the employment of resources i.e. they evaluate the efficiency with which the firm manages and utilises its assets. The greater the turnover, the more efficient the utilisation or management of the assets.

Capital turnover ratio =                      sales

                                    capital employed

2000                                 2001                         2002

1600/1093= 1.46         1800/1052= 1.71         1775/1042= 1.70

Sales to fixed assets = sales/net fixed assets

2000                                 2001                         2002

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1600/743= 2.15         1800/811= 2.21         1775/850= 2.08

working capital ratio =               sales

                                            working capital

2000                                 2001                         2002 

1600/-88 =-18.18          1800/-181 =-9.90         1775/-123 =-14.43

Debtors turnover ratio = net receivables      * 100

                                             net sales

2000                                 2001                         2002

68/1600*100= 4.25%    75/1800*100= 4.16% ...

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