Ratio Analysis

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As part of the system of financial control in an organisation, it is important to measure progress to establish how well the company is doing. A common means of doing this is through ratio analysis, which is concerned with comparing relationships between variables found in the financial statements.

The key to obtaining meaningful information from ratio analysis is comparison: 1. comparing ratios over a number of periods within your business to establish whether the business is improving or declining, 2: comparing ratios between similar businesses to determine whether your company is better or worse than average within the same sector. Ratios have been grouped into the following categories:

Solvency ratios – These ratios review the solvency of an organisation, measuring how well the company can satisfy its short term and long term obligations.

Efficiency ratios – These provide some indication of how effectively the assets of the business have been efficiently managed.

Profitability ratios – These are used to assess whether the business has succeeded in making an acceptable level of profit.

Year Ending 31st March 2004 2005 2006 2007 2008
Solvency Ratios
Current Ratio 2.6 Good 1.7 Neutral 1.6Neutral 2.0Good 2.6Good
Current liabilities to net assets 63% Neutral 146% Bad 162%Bad 100%Bad 63%Neutral
Operational cost provision (Months) 6.5 Neutral 2.4 Bad 2.1Bad 2.8Bad 3.8Neutral
Debt to Equity Ratio 20% Good 28% Good 32%Good 28%Good 20%Good
Efficiency Ratios
Collection Period Ratio (days) 52 Neutral 37 Good 29Good 18Good 27Good
Turnover to Assets Ratio 135% Good 227% Good 326%Good 317%Good 260%Good
Turnover to Net Working Capital 519% Good 1,538% Good 2,154%Good 1,435%Good 1,000%Good
Creditors to Turnover 12% Good 10% Good 8%Good 7%Good 6%Good
Profitability Ratios
Profit Margin 18% Good 13% Neutral 14%Neutral 18%Good 13%Neutral
Return on Assets 24% Bad 28% Bad 47%Bad 58%Bad 34%Bad
Return on Shareholders Equity 29% Good 36% Good 62%Good 74%Good 40%Good