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To make rational assessment in keeping with the aims of an organization, managers must
do investigation by using diverse tools. The type of analysis varies according to the
specific interest of the party involved. Financial analysis involves the use of various
financial statements. We can analysis the financial statement of an organization by using
different methods. For business manager financial ratios are very helpful. Ratios can
gives out as signs, hints concerning notable associations among variables employed to
calculate the company’s presentation in tenures of profitability assets utilization liquidity,
leverage or market valuation. The uses of financial ratio analysis are
To build comparison between its own years and find out the performance either it
is decline or recovered.
By using these methods for analysis on the financial statement of MG Fabrication plc for
the financial year 2008, 2009 and 2010, we can make decision about the financial site of
the organization. The study of the organization’s Income statement and Balance Sheet is
as under.
BALANCE SHEET
A balance sheet is a depiction of a business' financial circumstances at a definite instant
in time, usually at the close of an accounting period. At the end of financial year
following heads are listed as of a precise date.
Assets
Liabilities
Ownership Equity
The main clusters of assets are usually written first and typically in order of liquidity.
Assets are followed by the liabilities. A net asset is the distinction between the assets and
the liabilities.
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2008 2009 2010
£ £ £
Current assets:
Cash at bank 0 0 0
Loan 0 0 44665
Equity Capital
INCOME STATEMENT
Profit and loss statement (P&L), operating statement, earnings statement, or statement of
operations, is an organization's financial statement that shows how the profits is
converted into the net income. It shows the incomes distinguished for a precise period,
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and the expenditure and costs incriminated against these profits, including write-offs. The
principle of the income statement is to demonstrate managers and investors to find out the
financial condition of organization whether it is going better or going diminish.
An income statement is that it symbolizes for a period of time with the combination of
balance sheet.
£ £ £
Overview Of RATIOS
Financial statement ratio can be divided into following heads
Activity Ratio
Profitability Ratio
Liquidity Ratio
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Liquidity ratio used to determine a firms capacity to meet short-term
obligations. We can analyze the present cash solvency of the firm by using
this ratio. Liquidity ratio can be divide into two categories
Current ratio
Quick ratio
Financial Leverage
Financial leverage tells about the total debt analysis in the firm against the assets
and equity. It will tell about the overall debt position in the company. Financial
leverage can be partitioned into following ratios
Debt-to-equity ratio
CURRENT RATIO: -
Current ratio calculates a firm’s capability to disburse immediate obligations. It matches
up a firm's current assets to its current liabilities. The higher the current ratio the higher
will be the firm’s ability to pay its liabilities.
CURRENT ASSETS
CURRENT RATIO =
CURRENT LIABILITIES
FY2008 FY2009 FY2010
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Current Ratio
0.02
0.018
0.016
Ratio
0.014
0.012
0.01
0.008
0.006
2008 2009 2010
Year
The most favorable condition is 1 in this ratio. In FY2008 the value is less than 1 (i.e.
0.856581754) that means it has less ability to pay its liabilities. For each $ of obligation
there is 0.856581754 of assets. In 2008, firm’s ability to pay short-term liabilities against
current assets is less than its ability in FY2009 and FY2010. So, firm’s business is in
good condition in 2009. But in 2010 the current assets look in idle condition, but it not
could be true in all cases. Overall we can say that company is in good condition in paying
its obligation. We also can see in graph that company is in best condition in FY2009.
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Current Assets - Inventory
Quick Ratio =
Current Liabilities
Quick Ratio
0.016
0.014
0.012
Ratio
0.01
0.008
0.006
0.004
2008 2009 2010
Year
In FY2010, the firm’s business is in good condition to pay its liabilities against current
assets after purify inventories. In FY2009 the company has a better condition than
FY2008. The table shows that company is doing well for its paying obligation. By
comparing previous current ratio chart we can see that there is not much difference in
FY2010. The graphical view of quick ratio is given above.
DEBT-TO-TOTAL-ASSETS RATIO: -
These ratios indicate a level of debt against overall investment in business. High level of
this ratio indicates high level of debt in business and low level of this ratio indicate low
level of debt and is favorable for the business. The debt to total assets ratio is an indicator
of financial leverage. It tells you the percentage of total assets that were financed by
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creditors, liabilities, debt. The debt to total assets ratio is calculated by dividing a
corporation’s total liabilities by its total assets.
Total Debt
Debt-To-Total-Assets Ratio =
Total Assets
Debt-To-Total-Assets Ratio
68
66
64
62
Ratio
60
58
56
54
52
50
2008 2009 2010
Year
DEBT-TO-EQUITY RATIO: -
These ratios indicate the extent of debt in the business and distinguish the risk related to
business. It compares the level of investment by owner with the level of debt. The Debt to
equity ratio can be computed by dividing a organization’s liabilities by its equity
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Total Debt
Debt-To-Equity Ratio =
Shareholder’s Equity
Debt-To-Equity Ratio
62
58
54
50
46
Ratio
42
38
34
30
26
22
18
2008 2009 2010
Year
The level of investment by owners’ w.r.t debt is less in FY2009 than in FY2008 and
FY2010. Low ratio will show the higher the rank of finance presented by shareholders
and lower rate will indicate the creditor’s defense in case of hammering. In this ratio
FY2010 is the most risky situation as also indicated in the chart where it goes high as
compare to other previous years.
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INVENTORY TURNOVER: -
Inventory turnover will show that how many times the inventory is frequently updated
and utilized.. A ratio showing how many times a company's inventory is sold and
replaced over a period The higher the turnover of inventory the more efficient is the
inventory management of the firm and the fresher the inventory of that firm.
Inventory turnover is higher in FY2008 with compare to FY2009 and FY2010 so,
company is in good condition and more updated inventory is available. In FY2008 the
company’s inventory turn into sale by 5.618341363 and FY2009 its ratio tend to high and
in FY2010 it again decline to 4.330804801 as shown in the chart. The best year is the
FY2009 in this situation.
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Inventory Turnover
6.5
6
5.5
Ratio
4.5
4
3.5
3
2008 2009 2010
Year
Inventory * 365
Inventory turnover Days =
Cost of Good Sale
10
Inventory Turnover Days
280
260
240
220
Ratio
200
180
160
140
120
2008 2009 2010
Year
In FY2008, the firm is in less efficient in turning its inventory into accounts receivables
through sales. So, FY2010 is the favorable year for firm in terms that it takes lesser days
to turn the inventory into accounts receivables through sales. By analyzing the chart the
line continuously showing the better condition regarding to the inventory turnover
RECEIABLE TURNOVER: -
This ratio tells us the number of times Accounts receivable can be converted into cash
during the year. The high turnover rate will show the shorter time period between sales
and cash assortment and is superlative for business.
Credit sales
Receivable turnover =
Average Account Receivable
FY2008 FY2009 FY2010
Receivable Turnover 3.511463352 3.568099858 2.213748635
Net Credit Sales 58674.0321 92411.60056 127616.0198
Avg Account Receivable 16709.2822 25899.38742 57647.0236
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Recievable Turnover
4
3.75
3.5
3.25
3
Ratio
2.75
2.5
2.25
2
1.75
1.5
2008 2009 2010
Year
By cunning the ratio we see that in FY2009 it is slightly better than FY2008 and more
recuperated than FY2010. Hazard from bad debt is high in FY2010 with 2.213748635
ratios. The best situation is in FY2008 where the ratio is low with 3.511463352. The best
situation also portrayed from the chart.
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Recievable Turnover Days
240
225
210
195
180
Ratio
165
150
135
120
105
90
2008 2009 2010
Year
The proportional ratio on receivable turnover days shows less competence of firm to
collecting its payments from the clients. In FY2009 and FY2010, the firm is less efficient
to gather its imbursements from the customers. So, FY2008 is the favorable year for firm
in terms that it takes lesser days to turn the sales into accounts receivables. The chart also
shows the less efficiency in FY2009 and FY2010.
Net sales
Total Assets Turnover =
Total Assets
13
92411.6005
Net Sale 58674.0321 127616.0198
6
25063.9233 51798.7748
Total Assets 113623.119
1 3
4
3.5
3
2.5
Ratio
2
1.5
1
0.5
0
2008 2009 2010
Year
High ratio will show the better condition in this ratio. So in FY2008, the firm is in good
condition as compared to FY2009 and FY2010 as the sales revenue with respect to asset
investment is higher than in FY2008. This also can be analyze in the graphical chart of
this ratio.
This ratio is use to compute the efficiency of fixed assets to produce sales. Higher the
ratio betters the use of fixed assets. This ratio tells how efficiently the fixed assets are
being utilized.
Net sales
Fixed Assets Turnover =
Fixed Assets
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Net Sale 58674.0321 92411.60056 127616.0198
4
3.5
3
2.5
Ratio
2
1.5
1
0.5
0
2008 2009 2010
Year
This ratio illustrates that the company is in well condition as every passing year the ratio
goes high. In FY2010 it is 3.780907322 which is the higher than in FY2008 and FY2009.
As the ratio goes high, company is constantly increasing its assets over sale and utilizing
its fixed assets more efficiently. Chart of fixed assets turnover is given above.
PROFITABILITY RATIOS:
PROFITABILITY IN RELATION TO SALES: -
The measurement of firm’s operation as well as sign that how products are cost. It is
measure to review a firm's financial strength by exposing the fraction of money excluding
from income after accounting for the cost of goods sold.
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FY 2008 FY 2009 FY 2010
22
21
20
19
18
Ratio
17
16
15
14
13
12
2008 2009 2010
Year
In FY2010, the firm is less efficient in its operation as the gross profit margin is lower
than in FY2009 and FY2008, which show that cost of producing goods related to sales,
has increase in FY2009 and FY2010. The graph also shows the high tendency of good
sold.
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EBIT
Operating Profit Margin = *100
Net Sales
95
94
93
Ratio
92
91
90
89
88
2008 2009 2010
Year
There is slightly difference in all three ratios. In FY2010, Firm is in good position as the
operating profit margin is lesser in FY2010 as compared to FY2008 and FY2009, which
shows low expenses. Chart of operating profit margin shows that operating expanses
going decrease.
The measurement of firm’s profitability of sales after excluding all the expenses and
income taxes is called net profit margin. It notifies the firm’s net profit per pound of
sales.
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Net Profit After Tax
Net Profit Margin = *100
Net Sales
FY 2008 FY 2009 FY 2010
12
11
10
9
Ratio
8
7
6
5
4
2008 2009 2010
Year
By relative analyzing of the net profit margin ratio we depict that the company profit
going less and its efficiency of profit is decreasing. However it is not bad if we see these
ratios as separate. In FY2008 the company is in good situation with ratio 10. However it
goes lower 8.73015873 in FY2009 and 5.42729603 in FY2010 as point out in the chart.
This ratio shows that how much earning a business get after investment. Higher ratio
shows higher earning. A performance measure used to assess the competence of assets
with return on assets. To calculate ROA, the net profit after tax is divided by the assets;
the result is expressed as a percentage or a ratio.
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FY 2008 FY 2009 FY 2010
Return On Assets
12
11
10
9
Ratio
8
7
6
5
4
2008 2009 2010
Year
The ratios obviously show that the company is in good condition on this particular.
However comparison with preceding year the company is declining profit. In FY2010 the
ratio is lower as compare to FY2008 and FY2009. It shows that in FY2010 for each £1
of assets there are £4.699615495 of profit. The graphical view can be seen in below
which clearly indicate the losing of profit by passing years.
RETURN ON EQUITY
This ratio demonstrates how much earning the business is getting from shareholder’s
investment.
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Net profit after tax
Return on Equity = *100
Owners equity
FY 2008 FY 2009 FY 2010
12.5807210 13.8630578
Return on Equity 10.48186746
7 1
8067.67941
Profit After Tax 5867.40321 6926.099177
4
46638.0517 58195.5260
Owner's Equity 66076.95818
9 2
Return On Equity
15
14.25
13.5
12.75
Ratio
12
11.25
10.5
9.75
9
2008 2009 2010
Year
In FY2010 the ratio of return on equity is lower than in FY2008 and FY2010 indicating
strong investment opportunities and effective expense management in FY2008. Return of
equity also seen from first to last the chart which is given in the next line.
Limitations:
The information provided in the financial statement, Income statement and Balance sheet
of MG Fabrication plc, during analysis of financial statement following limitation are:
• Due to non availability of Net credit sale, the figure of sales assumed totally that
is credit sale.
• Accounts payable turnover ratio can be calculated if the Purchases during the year
mentioned in the income statement. These ratios indicate the higher the ratio, the
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better it is, since it will indicate that the creditors are being paid more quickly
which increases the credit worthiness of the firm. Similarly Avg Payment Period
can also be calculated with the figure of purchases, which indicates shorter the
payment period better liabilities paid and good financial position
• On the basis of above information we can applied breakeven analysis. They can
give the manager a good indication of how costs and prices are related and can be
best utilised, and how they are related to capacity. The concept of margin of
safety is a simple guide to how safe is the current or planned operating level, and
how safe is maximum operating capacity. For example if the break-even point
occurs at 90% of full capacity, in other words a 10% margin of safety, the firm is
in a much greater danger of operating at a loss than if the break-even point were at
50% of full capacity. The break-even chart works best with the single product
department or firm, though a series of charts can be created to apply to different
departments within a firm producing different products.
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