2013.06.03.

Mrton Czupi 3/a

Ratio Analysis
Accounting ratios are used to build-up a corporate profile of the company under investigation. Ratios rarely point unanimously in the same direction; profit. Accounting ratios are calculated by expressing one figure as a ratio or percentage of another with the objective of disclosing significant relationship and trends that are not immediately evident from the examination of individual balances appearing in the accounting. Ratios are used to help the firm to evaluate its financial result, but they are meaningless until we compare them to previous years results or to other companys result in the same activity. We can see these ratios from three different angles; as a manager, as a creditor, and as an owner. For managers ratios monitor the performance against the budget and measure the effectiveness of the firm. For creditors ratios indicate how safe their loans are and assessment of the risk about future loans. For the owner(s) ratios show the riskness of their investment and the assessment of the future successful performance.

Beagles Limited
Liquidity Ratios:
Current or Working Capital Ratio examines the proportional relationship between current asset and current liabilities. The purpose of the working capital ratio is to help assess the solvency position of the business. Acid Test or Quick Ratio is very similar to current ratio but in this ratio the nonliquid current assets must be left out of the calculation, include stock and any trade debts not receivable in the near future. Quick ratio is more liquid than current ratio, because stock is not calculated in it. Both ratios show the liquidity of the company, but the difference between these two ratios is Stock/Current Liabilities. (As the table shows below)
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2013.06.03. 1994 Current or Working Capital Ratio Current Assets / Current Liabilities Stock / Current Liabilities Acid Test or Quick Ratio Current Assets Stocks / Current Liabilities 1,23 1995 1,16

Mrton Czupi 3/a 1996 1,09

0,56

0,54

0,50

0,67

0,62

0,59

The current ratio is 1,23 in 1994, which means that the sum of the current assets are 1,23 times more than the sum of the current liabilities. The current ratio decreased by 0,07 in every two years, it means that the companys current liabilities increased more that its current assets. It can be seen in the Balance Sheet as well that the current assets increased by 129,000 and by 189,000, meanwhile the current liabilities increased by 202,000 and by 275,000 between 1994 and 1996. The company will not have any problem until the current ratio reaches 1, because it means that Beagles Ltd. can not pay its liabilities from its assets. Stocks increase also but in a smaller proportion than the current liabilities, which means that the quick ratio decreased by a smaller proportion too. These ratios rise up the problem that the company is getting more liquid, more easily converted into cash.

Rate of collection of Debtors:

The period of credit allowed to customers is an important business decision. Too little credit makes it difficult to achieve a satisfactory level of sales; on the other hand too much credit deprives the company of essential liquid resources. Debtors days in our company is calculated by dividing average trade debtor with the credit turnover multiply by 360, the number of working days in a year. It is not really useful using average data at the end of the year, because it will not give the management useful information, exact days. From our
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companys Balance Sheet we used debtors divided by sales and we multiplied this with the number of working days (360). We could use sales, because it equal to the credit turnover. From the Ratio table we can see that Beagles Ltd. debtors days is 39 in year 1994 and it increase by 1 to the year of 1995 and remain the same for 1996. These 39 and 40 days is the difference between orders is received and the payment is made. This is the time when others use our money and we finance them. In our company it is almost six weeks, which is around the normal credit period (6-8 weeks) for customers to pay their bills.

Rate of payment of suppliers:

This is the average period of time taken by the company to pay its bills. Creditors days is counted similarly as the debtors days, but in here the average trade creditors divided by the credit purchases than multiply by 360 days. This result is also an average so we count it as a dividend of creditor and cost of sales (COS) multiply by 360 days. The result of the calculation must be interpreted with particular care since not all suppliers grant similar credit terms, but provided there are no significant changes in the mix of trade creditors. From the appendix we can see that the figure decrease to 38 days than increase by 1 back to 39 days. This is the time when the company uses the money of the creditors. We can see that
1996

Debtors days Vs Creditor days 39

debtors days and creditors days are almost the same, means that the balance between the debtors and creditors are the same too.

40 days

1995

38

40 days 39 39 days

Creditor Days Debtors Days

1994

So our customers pay approximately at the same time when the company needs

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to pay its bill. Possibly this is why the company has no cash in the Bank in the year end of 1995 and 1996.

Stock Turnover:
This shows the difference between buying and selling our stock in days. It is calculated by the dividend of average stock and cost of sales and multiplies it by the number of working days. The result shows us how many days the stock is being kept in our warehouse. In Beagles Ltd. it is 53 and 54 days, which is relatively high. This is an additional payment for the company to keep the stock in the warehouse. If the company can reduce these days it will reduce its cost and increase its profit. Possibly they can not sell their stocks.

Profitability Ratios:
Gross Profit Margin is calculated by dividing gross profit and sales. The result is in percentages, which shows the percentage of gross profit from the sales. So in 1994 this percentage is 34, means that from the sales 34% is the gross profit and 66% is the cost of sales. The ratio increases from 1994, but we do not know if it is good or not because we do not know further information about the company and the market.
66% 34% Cost of Sales Gross Profit Sales

Net Profit Margin is calculated from the net profit divided by sales, but the net profit in Beagles Ltd. is the profit before taxation. The results are also in percentage and they also show slight increase from 12,94% to 13,33%. The difference between these to ratio is the expenses over sales which is also growing from 21,15% to 22,65% which shows that the companys expenses
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are growing in a higher ratio than its sales. This leads us to the decrease of our profit before tax and with it the decrease of retained profit in our Balance Sheet. Return on Capital Employed (ROCE) is the figure that examine the relation between profit and the amount of money invested (capital employed) to the business. It is calculated by dividing the opening profit (profit before tax) by the sum of the shareholders equity and the long term loans. From the appendix the figures are decreasing from 117,67% to 107,02% and for the end of 1996 it is 87,82%. In 1994 and in 1995 we have more profit than the money we invested into the business. There is a big difference in the year of 1996 when it decreases by 30%. The operating profit increases but less than the capital profit, than in the year of 1996 there is a big amount (252,000) of long term loan in the Balance Sheet, which explains this dramatically decrease in the ROCE. Return on Owners Equity (ROOE) is shows how much money can we gain from the business. It is calculated from the dividend of the profit after tax and the equity or in our example the dividend of net profit and capital. The result in 1994 is 70,58%, measures the percentage of money that the owner(s) gain back from the business. This ratio also decreases means that the owners invest more money into the business than they gain from it. If it is a new firm it is necessary at the beginning.

Conclusion:
All in all Beagles Ltd. is possibly a new firm on the market and that while they can not sell their stock easily and can not make enough profit for its owners, but there will be better days. It has no problem of paying its creditors, because debtors and creditors days are barely the same. The current ratio is getting closer to 1, which means that the firm is depend on its supplier because without them it can not pay its liabilities since it has no money in the bank. The firm should make a bigger difference between creditors and debtors days so

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they do not need to rely on them. I would suggest them to keep at least a small amount of money in the bank so they can be payable at any time. There is a lot of stock in the current assets so it takes a lot of time to take out money from the business, it need to be changed with the long stock days period. If they can push the ROOE over 1 and their money comes back and owners will make profit from a business.