Analysis of Financial Statements for Business Y and Z
Name: Hassan Ahmed
Unit: 2
Task: 8
Analysis of Financial Statements for Business Y and Z
Solvency
Current ratio
The current ratio is An indication of a ability to commitment; the higher the , the more the is.
=
This ratio shows how many assets a business has compared to liabilities.
Business Y
180,000
90,000
= 2:1 Ratio
For business Y this ratio indicates that current assets are twice as large as current liabilities. This simply means that the business can pay they can pay their liabilities. It is considered good practice that a business to have a figure between 1.5 and 2, so that the business can be sure it can pay its liabilities easily.
Business Z
80,000
16,000
= 5:1 ratio
This is not an ideal ratio because it is higher than 2 and means that the business is not using their assets well and would not be as good as the money should be place elsewhere to improve the business.
Acid test ratio
The acid test ratio shows the assets compared to liabilities, like the current ratio, but by taking out the stock figure from the current assets, its shows how well a business can meet its liabilities without having to sell ...
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80,000
16,000
= 5:1 ratio
This is not an ideal ratio because it is higher than 2 and means that the business is not using their assets well and would not be as good as the money should be place elsewhere to improve the business.
Acid test ratio
The acid test ratio shows the assets compared to liabilities, like the current ratio, but by taking out the stock figure from the current assets, its shows how well a business can meet its liabilities without having to sell stock.
Current assets – current stock
Current liabilities
Business Y
180,000 – 110,000 = 0.78
90,000
This shows that business Y is not doing well because the acid test shows that it is not between 1 and 2 which means it’s not doing well in meeting its liabilities without having to sell assets. If they do not sell any stock then there are in danger.
Business Z
80,000 – 50,000 = 1.9
16,000
This shows that business Y is doing well because the acid test shows that it is between 1 and 2 which means it’s doing well in meeting its liabilities without having to sell assets.
Profitability
Gross profit percentage
Gross profit percentage shows gross profit as a percentage of the turnover (sales and any other income that a business gets. Gross profit percentage is sometimes called gross profit margin. The calculation shows how well the business is managing its purchases of stock. A high gross profit shows the business is doing well in controlling the costs of its purchases.
Gross profit X100
Turnover
Business Y
60,000 X100 = 24%
250,000
The gross profit percentage is a low gross profit which shows that business Y is not doing in controlling the costs of its purchases.
Business Z
60,000 X100 = 37.5%
150,000
The gross profit percentage is a higher gross profit than Business Z which shows that business X is doing in controlling the costs of its purchases.
Net profit percentage
This calculation takes the idea of profitability on stage further by actually considering the profit as a percentage of turnover after all the other expenses have been taken out. This shows the profit that the business has made before tax has been taken off. This also shows how well the business manages its other expenses especially when it is compared to the gross profit percentage. If a business has a high gross profit but a low net profit percentage, its day to day running costs such as wages, rent and insurance is too high, as they are taking too much profit from the business.
Net profit X100
Turnover
Business Y
25,000 X100 = 10%
250,000
This shows that business Y is not managing its operating costs (day to day running costs) as well as it should and should think about saving in some area such a rent, wages and insurance because they are taking too much money from the profits and cutting down on some operating costs it could increase the profit.
Business Z
32,000 X100 = 21.3%
150,000
This shows that business X is not managing its operating costs (day to day running costs) as well as it should but it doing a better job than business Y because the net profit percentage is higher. They should also think about cutting down on operating costs in order to keep costs down and increase profit.
Return on capital employed
This is the final calculation that a business might use to judge profitability. It is worked out by considering the net profit as a percentage. This is a useful way to judge profitability because it allows investors to show the amount of money an investor is receiving back on their capital as a percentage. This means they can compare the percentage received against what they would have received in they had opt to put it in the bank.
Net profit X100
Capital employed
Business Y
25,000 X100 = 10% = 20.8%
120,000
This shows that the people that have invested money in the business is 20.8 % of what the put which is low compared to business X which shows that business X is the business to invest in. an investor would be happy with is amount but no as happy as 40% but is still more than they would have got in a bank.
Business Z
32,000 X100 = 40%
80,000
This is higher than business Y which means the investor would be getting 40 % of his capital back, which is higher than they would get a bank. Investors would be happy with this amount.
Performance
Stock turnover
Stock turnover is useful because they show how quickly a business has sold its stock. This is also useful way if measuring efficiency, as the faster the stock is turned over the more likely the business is to be efficient. This is particularly important if the goods being sold are perishable for example food.
Average stock X 365 = stock turnover
Costs of sales
Business Y
100,000 X 365 = 193 days
190,000
Business Z
40,000 X 365 = 146 days
100,000
What this calculation shows is that business Z is doing better than Business Y in the amount of days it takes to sell it stock. The benefit of selling stock quickly is that you won’t have to worry about goods going out of date and people selling. This is important in perishable goods for example food because they can go out of date quickly and need be sold at a rate which ensures they don’t.
Debtors’ collection period
Debtors’ collection period is the average it takes the business to collect its debts. The fewer the number of days means the business has better credit control, because it collects what is owed more quickly.
Debtors X 365 = Debtors’ collection period
Credit sales
Business Y
62500 X 365 =91.25 days
2500
This shows that business Y is not in a ideal position because it will have to wait 91 days, the problem of waiting 91 days to collect debts is that it increases the risk of not being paid and could end up losing the business money. The ideal time it takes it receive debts is on month and business Y is three times that amount.
Business Z
20,000 X 365 =45.6 days
160,000
Business Z is a better position than business Y because it takes them 45 days to collect their debts which are just over the required amount of 30 days, which means the risk of not being paid is less than business Y.
Asset turnover
By using Asset turnover, the business is able to work out how many pounds it earns for every pound invested, this is a good indication for investors and shareholders for the business.
Sales = asset turnover
Total assets
Business Y
250,000 = 1.39
180,000
Business Z
160,000 = 2
80,000
This calculation shows business Y is getting 1.39 pounds on every pound it invests in which is not as high as business Z. whereas business Y is making 2 pound on every pound it invest which means that is the better business to invest in. investors will look at this type of information to see where to invest in.