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Managing Finance: Financial ratio analysis - Coursework Example

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Managing Finance: Financial ratio analysis

In the last section of the paper we analyze how the firm should management its resources efficiently so as to achieve the optimal profit level. All this practices and analyses are undertaken so to manage the finances efficiently. Section A Financial ratio analysis: Ratio analysis helps in evaluating the financial soundness of the organization. In analyzing the financial statement of a company one can either carry out a trend analysis where he compares from the financial information of a company for certainty duration of time may be three years, while a cross sectional analysis is a comparison of a company financial statement against those of other firm(s) in the industry. In this case we will a conduct a trend analysis of Barney Bakes plc for a period of years from 2007 to 2011. Let commence by introducing the various categories of ratios that will helps evaluate the company performance over the years. Ratios are normally categorized into five categories namely; Liquidity ratios which includes quick ratio, and current ratio; profitability ratios which includes Return on shareholder Funds, Return on capital employed, gross profit margin, operating margin and profit after tax. Efficiency ratio which will include stock turnover, trade debtors, trade creditors, sales to capital employed, sales to capital employed (assets turnover) and sales per employee: gearing ratios, where we will consider gearing ratio: and lastly the investment ratios where we shall consider, dividend payout, dividend cover, dividend yield, Earning per share, and Price/ Earning ratio Using the above ratios we shall evaluate the profitability, liquidity, leverage, and efficiency and investors analysis Profitability analysis In order to conduct a profitability analysis we shall embark on calculation of the Profitability ratios which shall help us ascertain whether the organization has the ability to generate returns on the investment. Profitability ratios can be categorized into those in relation to sale and those in investment Gross margin This ratio helps determine the returns that a firm makes on cost of sales. Gross profit margin indicates the ability of the company sales to generate returns. This ratio is usually expressed in percentage of revenue from sale divided by the cost sales (Palepu and Healy 35) As depicted above, the company has low sales costs, thus being able to make considerable high returns. From the trend analysis, the company has managed to keep the gross profit margin constant over the four years showing that the company has been able to control its cost of sales, thus a higher gross profit. Operating margin The operating margin helps to indentify the amount of return per ? 1 of turnover a business has earned. This ratio is more relevant as compared to gross profit margin since it captures other cost such as marketing and administration costs. From the above table and figure, the company operating profit has worsened over years; this implies that company has been able to minimize its expenses. In the year 2008 we have the highest operating while the following year due to effects of global financial crisis the operating profit decline significantly. Return on capital employed Return on capital employed measure how efficiently the firm has been in using the net assets to generate returns in the business. As delineated above the return on capital employed has declined over the year period. This can be attributed to ...Show more


Managing Finance Date: Abstract With organizations becoming more and more complex and the level of competition increasing tremendously there is increased need to evaluate the financial health of the organization as adopting ways that helps the company to achieve a competitive against its competitors…
Author : caesar97
Managing Finance: Financial ratio analysis essay example
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