Report on Analysis of Financial Statement and Recommendations

for Lexicon Ltd

To: Managing Director, Lexicon Ltd
From: Ludmila Dorojan assistant accountant

Terms of reference/Introduction

The report includes a calculation of two ratios, and profitability, efficiency, liquidity and capital
structure ratios and four investment ratios have been calculated and analysed. Conclusions and
recommendations are included based on the findings. There are two sources of long-term finance
have been recommended appropriate to the company’s situation.

Profitability Ratios
Operating Profit Ratio

This indicates per £1 of revenue how much operating profit the company is earning. The higher the
better. There has been a reduction from 16.4% to 10.8%. This is not good. The improvement in the
company’s control of expenses has been more than offset by the reduction in the gross profit %age..

Return on Capital (Equity) Employed

This shows us how well the company is using its capital to generate profits. There has been a
decrease. From 34.9% to 24.6%. despite the increase in ordinary share capital there has been a sharp
decrease in operating profit.

Liquidity Ratios (Ability of Company to Pay in Short Term)

Current Ratio

This is an indication of the company’s ability to pay debts in the short term. At the end of 2017 the
company had £2.90 of current assets for every £1 of current liabilities. This was an increase from last
year’s figure of £2.50. This ratio is satisfactory, but an industry norm would be advantageous.

Acid test Ratio

At the end of 2017 the company had £1.50 in liquid assets for every £1 in current liabilities. This ratio
acknowledges that it is not