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Financial accounting - Essay Example

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Financial accounting

These are profitability ratios, financial leverage ratios, liquidity/solvency ratios, efficiency ratios, and investor ratios.
This report will look at the financial performance of HR Owen Plc.. In order to fully asses its financial health, the financial ratio analysis will look at the company's well-being during the fiscal years 2005-2006 and benchmark it with its key competitor, Antonov Plc
Profitability ratios measure the ability of the company to generate income from its investments less the costs incurred. Return on capital employed is a variant of return on investment. Return on capital employed (ROCE) is a measure how well the company is utilizing its capital. The computed sales profit margin, which is the ratio of operating income to sales measures as a percentage of sales, the excess revenue from sales over cost of normal operation excluding financing. Asset turnover measures the amount of sales generated by every pound in the company's assets. Net profit margin, on the other hand, is the ratio of net income to sales showing the company's ability to efficiently manage cost and turn its revenue into profits. Logically, higher performance ratios indicate a healthier financial condition.
Appendix 2 shows the profitability ratios of HR Owen Plc during the fiscal years 2005 and 2004 together with that of its competitor, Antonov Plc. ...
During 2004, HR Owen reports ROCE of 4.72% which has gone down to negative 77% in the following year. The company's ability to transform its revenue into profits has also suffered which indicates its inability to efficiently manage its operating costs. It should be noted that HR Owen has boost its ability to utilize its assets in order to generate sales. This is indicated by leap in the company's asset turnover from 19.46 times to 36.78 times in just a span of one year. Gross profit margin has also improved by 0.3%. However, amidst this increases in turnover and margin, HR Owen is not able to manage costs efficiently. Net profit margin for 2004 is 0.014% and dropped to as lows as negative 2.40% to reflect the company's net losses.
Even though HR Owen's year on year profitability is in a decline, it is still superior compared to Antonov Plc. Antonov recorded negative ROCEs during 2004 and 2005. It should be noted that the company's ratios cannot be properly computed because of their inability to report sales for 2005 and cost of sales for 2004 and 2005. Nonetheless, the other ratios still imply that HR Owen is in a better profitability position.

2.2. Activity or Working Capital Efficiency Ratios
Activity ratios are operating efficiency measures, which determine the ability of a company to maximise its output given a certain level of resources. These ratios significantly gauge the asset, investment, and cost management performance of the business entity. Ratios under this category are inventory, creditors' and debtors' ratio. The inventory ratio measures the number of days the inventories stay in the company's distribution center or warehouses. The ...Show more

Summary

Financial ratio analysis is a very essential tool in assessing the financial health of a business entity. It enables a financial analyst to spot trends in a business and to compare it with the performance of similar business enterprises within the same industry…
Author : katheryn45
Financial accounting Essay essay example
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