Ratio Analysis and Capital Budgeting

Question: Calculate some ratios for your firm (and also its economic profit) and assessing its business performance. Answer: Net profit margin: This is the ratio that helps in the calculation of the return on the sales. This is the profitability ratio which measures the amount of the return that the company is earning on the sales that is being generated by the company. The net income also compares the net income and the net sales of the company. The profit margin shows the % of the sales that is left after the payment of all the expenses (Accounting course, 2016). Net profit after tax/sales -4.8% 3.7% 2.6% 7.6% The above merely shows that the company is earning losses. The company was earning profits during the early years but the operations are being carried out wherein the company is earning losses. The company is incurring losses which means that the company consuming all its profits and all the necessary measures must be undertaken so that the company could start earning profits again. Return on assets: This is the ratio which is also known by the name of return on the total assets which is the profitability ratio. This measures the income which has been produced by the total average assets by the company. In the other words, the return on the assets helps in the measurement of the way in which the company is managing the assets for the purposes of profits during the period under review (Accounting course, 2016). Net profit after tax/total assets -2.0% 1.6% 1.3% 3.5% The above merely shows that the company is earning losses. The company was earning profits during the early years but the operations are being carried out wherein the company is earning losses. The company is incurring losses which means that the company consuming all its profits and all the necessary measures must be undertaken so that the company could start earning profits again. The stated ratio shall improve only when the net income earned by the company has improved. Days of inventory: This is the ratio which helps in the measurement of the number of days the company takes to sell the inventory. The lesser this ratio, the better it is for the company (Accounting course, 2016). Total asset turnover ratio: This is the efficiency ratio and helps in the measurement of the ability of the company to generate the sales from the employment of the assets. This helps in the comparison of the net sales with the total assets of the company. This helps in the measurement of the efficiency of the company when it comes to the use of the assets for the purposes of generation of the sales (Accounting course, 2016). Sales/total assets 0.41 0.44 0.50 0.46 The above ratio listed above shows that a decrease which is not good for the company since it means that the company is not putting enough efforts for the purposes of generating sales whereas the company should since the company evolves for generation of the profits. Current ratio: This is the ratio which is the liquidity ratio and helps in the measurement of the ability of the company to meet the liabilities that are short term in nature. This is done with the help of the current assets. The current liabilities are paid off using the current assets of the company. Current assets/current liabilities 1.03 0.68 0.51 0.42 The company with the greater amount of the current assets is able to pay off the short term liabilities in the shorter duration of the time. The company shows an increasing current ratio which is good since that means that the company is able to clear off its current liabilities with the help of the current assets (Accounting course, 2016). Debt equity ratio: This is the financial or the liquidity ratio which means shows the % of the financing of the company coming from the creditors and the investors. When this ratio is high, it shows that more bank loans are being used than the financing by the investors (Accounting course, 2016). Debt/equity 48.7% 32.0% 25.1% 20.8% The above shows that more amount of debt is being used which is not good because more debt means more risk for the company. Increased usage of the debt in the business means an increased amount of payment of the interest on the debt that has been borrowed. Equity ratio: This is the ratio that is the leverage or the solvency ratio of the company. This ratio helps in the measurement of the amount of the assets that are financed by the investment by the owners. This is achieved by the way of comparing the amount of the total equity invested in the company to the total assets. This ratio highlights two of the crucial components of the investment wherein the first is the total amount of the assets of the company that are owned by the investors of the company (My accounting course, 2016). Equity/total assets 80.6% 85.6% 94.9% 98.2% There has been a decrease in the equity ratio which indicates that the total assets of the company are being financed by the funds of the equity shareholders which in turn means that the debt is being used for the purposes of financing the assets of the company. This is not a god indication due to the reason that the increased debt shows more interest on the debt that has been borrowed for the company. Earnings per share: This is the ratio which is the earnings per share of the company. This is the market prospect ratio of the company. This is also known as the income per share and helps in the measuring of the amount of the money on each share of the company. It means the amount of the earnings on each share in case all the profits are distributed on the shares that are outstanding (My accounting course, 2016). Net profit after tax/nos of issued ordinary shares (0.60) 0.48 0.35 1.03 This means that the dividend per share is decreasing with each passing years. This shows lack of profits being earned by the company. Dividends per share: This is the sum that has been declared as the dividends for each of the ordinary shares that has been issued. This is computed by the amount of the dividends divided by the number of the equity shares that are outstanding. Dividends/number of issued ordinary shares 0.73 0.58 0.48 0.88 There has been a decrease in the amount of the dividend that has been earned during the year. This merely shows that the company is earning a lesser amount of the dividend on each of the shares that are outstanding. Price earnings ratio: This is the ratio whose short form is the P/E ratio. This is the market prospect ratio of the company which helps in the calculation of the market value of the stock to the relative earnings of the company. This ratio is compared with the market price of each of the share (My accounting course, 2016). Return on equity: The return on the equity is the ratio which is the profitability ratio. This helps in the measurement of the ability of the firm which is the generation of the profits from the investment of the shareholders in the company. This is the amount of the profit that has been earned by the investment of the equity into the company and it helps in the generation of the profits of the company (My accounting course, 2016). Comprehensive Income/shareholders' equity -2.45% 1.85% 1.35% 3.56% The above shows that the return has reduced. And it is due to this fact that the return on the equity has become negative. Return on net operating assets: This is the rate of the return on the assets that are operating. It helps the management in minimising the other asses in the books of account that is contributing to the revenue being generated by the company (Accounting tools, 2016). Operating income after tax (OI)/net operating assets (NOA) -0.96% 2.54% 2.25% 4.43% This shows that the operating income has become negative and the main reason behind the same is the decreasing operating income being earned by the company. Net borrowing cost: This is the borrowing cost of the company. This must be at the level wherein the interest on the borrowed capital is at the same level as the investment in the assets of the company. Profit margin: This is the ratio that helps in the calculation of the return on the sales. This is the profitability ratio which measures the amount of the return that the company is earning on the sales that is being generated by the company. The net income also compares the net income and the net sales of the company. The profit margin shows the % of the sales that is left after the payment of all the expenses (Accounting course, 2016).The above merely shows that the company is earning losses. The company was earning profits during the early years but the operations are being carried out wherein the company is earning losses (Accounting tools, 2016). The company is incurring losses which means that the company consuming all its profits and all the necessary measures must be undertaken so that the company could start earning profits again. Asset turnover: This is the efficiency ratio of the company which helps in the measurement of the generated sales from the assets that have been employed by the company (My accounting course, 2016). Sales/net operating assets (NOA) 0.41 0.44 0.50 0.46 The above shows that the return that is being used for the purposes of generating the sales has reduced. Economic profit: Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs; accounting profit consists of revenue minus explicit costs (Boundless, 2016). (RNOA - cost of capital) x net operating assets (NOA) (1,451.5) (169.4) (196.0) 469.0 This is negative which is not for the company. NPV and IRR: The net present value of the company comes out to be positive with the rate of return to be 14%. In case, the internal rate of return that is company wants comes tout to be 10% or less than 14%, then it would be wise for the company to accept the investment in this project since then the company would be in profit rather than being in losses. Recommendations: Taking into base ratio analysis: If we check out the net profit margin ratio, it clearly depicts that Company is in decreasing order which implies that profitability is reducing. Hence it is advisable that steps must be taken to increase the sale by initiating the marketing as well as simultaneously cost must be reduced (Accounting tools, 2016). Also, the economic profit shows huge decrease even negative. This scenario clearly predicts that the company is not showing good performance. Taking into consideration the same it is required to undertake initiative so that the performance of the company could be increase. Moreover, The company was earning profits during the early years but the operations are being carried out wherein the company is earning losses. The company is incurring losses which means that the company consuming all its profits and all the necessary measures must be undertaken so that the company could start earning profits again. For NPV and IRR: Net present value for the investment is positive which implies that proposed investment must be undertaken so positive NPV clearly depicts that the product could be undertaken without any hassle. Thus as already stated The net present value of the company comes out to be positive with the rate of return to be 14%. In case, the internal rate of return that is company wants comes tout to be 10% or less than 14%, then it would be wise for the company to accept the investment in this project since then the company would be in profit rather than being in losses (Accounting tools, 2016). References: Accountingtools.com. (2016).Return on Operating Assets - AccountingTools. Difference Between Economic and Accounting Profit. (2016).Boundless. My Accounting Course. (2016).Asset Turnover Ratio | Analysis | Formula | Example. My Accounting Course. (2016).Asset Turnover Ratio | Analysis | Formula | Example. My Accounting Course. (2016).Current Ratio | Formula | Analysis | Example. My Accounting Course. (2016).Days Sales in Inventory Ratio | Analysis | Formula | Example. My Accounting Course. (2016).Debt to Equity Ratio | Formula | Analysis | Example. My Accounting Course. (2016).Earnings Per Share | Formula | Analysis | Example. My Accounting Course. (2016).Equity Ratio | Formula | Analysis | Example. My Accounting Course. (2016).Price Earnings P/E Ratio | Analysis | Formula | Example.