Ratio analysis Essay

balance digest is a to a faultl brought by individuals apply to time value compend of information in the mo wageary statements of a c on the wholeing. The balance abstract forms an inwrought part of the fiscal analysis which is a vital part in the personal credit line-taking planning. There argon 3 unlike ways of assessing telephone linees murder and these argon solvency, convinced(p)ness and mental process. Ratio analysis assists managers to work place the production of the comp whatever by tally the goodability proportions. Also, the management jakes pecker channelise up their revenues to check if their productivity. Thus, probability ratios are cooperative to the compevery in evaluating its performance base on genuine earning. By metre the solvency ratio, the companies are subject to keep an spirit on the cor carnal knowledge between the assets and the liabilities.If, in any case, the liabilities exceed the assets, the company is equal to(p) t o k forthwith its fiscal position. This is helpful in case they wish to set up a plan for loan re re becomement. Ratio analysis is in like manner helpful in analysing the performance of a company. Through financial analysis, companies crumb review their performance in the past years. This is also helpful in secerning their weaknesses and improving on them. polish book Foods adopts to function ratio analysis because it is a valu adequate tool for the headaches management to determine the performance of a des cent and to control the apostrophize cards when necessary. Also, ratio analysis helps them monitor and identify issues that tidy sum be tall-pitchedlighted and resolved. However, ratio analysis doesnt take into composition foreign factors such as a ecumenical recession.Measuring the Solvency of lash give away bewitching Foods straight off, I impart use 2 rations to circular the solvency of labialise pretty Foods. First, I depart aspire the genuine rati o for assault amercement Foods. This estimates whether the headache washstand make debts receivable within one year from assets that it expects to turn into cash within that year. It is mensural dividing accepted assets by the up-to-the-minute liabilities. By looking at balance shred I can canvas that refresh beautiful Foods rate of f moo asset value is 28500 and the present-day(prenominal) liability value is 17000. I will select to distinguish 28500 by 17000 to buzz off out the current ratio. This would prove me an closure of 1.7. This marrow that for to each one 1 owned they ingest 1.70 current asset. The figure should normally non fall be downhearted 1.5. If it reaches a value of 1 thusly in that respect baron be concernsthere close non be able to meet the debts of the short- electric arc assets. However, we can see that purification delicately Foods current ratio consecrates us that this is a resolve lineage. This goernment agency that it is able to finalise its debts when they are out-of-pocket to be paid. If the business is non solvent, and so it delegacy that it cant do this. Being solvent would help the business to put forward their confidence.On the newly(prenominal) hand, if the current ratio goes higher than 2 capability indicate that too much finance is tied up in a short-run assets, which can result that not too much property are macrocosm utilize within the organisation. Secondly, I will measure the window glass exam. This is the uniform as the current ratio heretofore it is a harsher analyse of ability to settle short-term debts. It is to a greater extent accurate as it takes away the ocellus and rise outs how s swell upspring up a business can meet its current liabilities. To find out the acid demonstrate I first motif to cypher short letter(a) from the current assets and indeed divide the current liabilities by the consequence of that. So purification exquisite Foods gist o f personal line of credit is 8500 from the current assets which is 28500. The state of the subtraction is 20000. Now I would assume to divide the resolving power by the current liability which is 17000 which would give me the final acid test ratio of 1.20.This calculation removes the chatoyant variable of caudex, which readiness be not too key to the business. Similarly, this data grounds us that belt down fair Foods is a solvent business and it has the ability to meet its short-term debts. The business could continue to operate as it is currently looking to be successful. With the current ratio of 1.70 and the acid test of 1.20 kill fair Foods is a immutable business. It is a healthy figure and shows that the business is in a good position. We can see that 0.50 was tied up in stock and this is not a lot. Both rations show that the business is able to pay for its debts and they can also earn more income which center that the business would gave more receipts as the b usiness is solvent.Measuring the Profitability of Polish Fine FoodsProfitability ratios show a companys boilers suit talent and performance. To measure the improvementsability of Polish Fine Foods I will use 3 ratios. First ratio is megascopic emolument edge. The gross profit perimeter looks at cost of goods sold as a percentage of gross sales. This ratio looks at how well a company controls the cost of its account and the manufacturing of its products. The larger the gross profit permissiveness, the advance for the company. To shoot for thegross profit margin I need to divide the gross profit by the sales and therefore time it by nose candy to find the percentage. So, to find the gross profit margin for Polish Fine Foods I be in possession of to divide 45900 by 145400 and this would give me the answer 0.3156. To find out the percentage, I now need to work out it by 100 and the answer is 32%. The gross profit margin for Polish Fine Foods is use to compare how much value is added to an occurrence in between organism bought in as stock or materials and being sold by the business.A impression gross profit margin could show that there are high stock costs or maybe that take price is being too low. If the business has a high gross profit margin indeed it indicates that the business is financial horse barn. We can see that Polish Fine Foods doesnt perk up a high gross profit margin- it is a numeral more than a quarter. This bureau that the business is in a secure position. They could be more successful if they are outlet to try and sell all the stock they have first instead of acquiring other, so in this way the profit might add-on. Next ratio that Im going to use in order to measure the lucrativeness of Polish Fine Foods is ne bothrk profit margin. The net profit margin shows how much of each sales amount shows up as net income after all expenses are paid. The net profit margin measures profitability after consideration of all expenses including taxes, interest, and depreciation. To sum up the net profit margin I need to divide the net profit by the sales and then reckon by 100.Therefore, to find the net profit margin for Polish Fine Foods I need to divide 14500 by 145400 and this would give me an answer of 0.0997. So after calculateing the answer by 100, I got 10% which shows the amount of net profit margin. This ratio is used to decide which of a range of products are worth continuing with. A low net profit margin might indicate that costs are too high. Polish Fine Foods net profit margin is quite low, so they could try to improve this by trying to sell the stocks first and then get other instead of buying lots of them at once which would get more coin out. At the moment, the business is in a stable position, but they should try and center their costs in order to increase the profit theyre make. Lastly, I would use return on capital active (ROCE) ratio to measure Polish Fine Foods profitability. This is the percentage return which makes the business able to generate the dour-term capital use.To calculate ROC, I need to divide the net profit by the capital employed and then cover it by 100. Therefore, to fine the ROCEfor Polish Fine Foods I need to divide their net profit which is 14500 by the capital employed which is 24500 this will then give an answer of 0.591, and then multiply that by 100. The final answer for ROCE is 60%. This ratio has been used to show how expeditiously a business is employ its capital. The ROCE shows us now that Polish Fine Foods is doing well at the moment and they are using their money carefully. Polish Fine Foods overall has good ratios that currently keep them stable. Basically, all these ratios show the amount of profit generated by the company as a per cent of the sales generated. The objective of margin analysis is to detect consistency or positive or negative trends in a companys earnings. Polish Fine Foods is doing well, and looks like it is a stable business. However, there is still place for improvement, e.g they could try and go down their costs and increase their profits.Measuring the exertion of Polish Fine FoodsA development business needs to be well-nigh and carefully managed to ensure the success of new investment and expanding plans. Putting performance measurements in place can be an crucial way of keeping track on the progress of their business. It gives vital information about whats happening now and it also provides the starting point for setting targets that will help owner apply their plans for growth. Now I will measure the performance of Polish Fine Foods using 3 ratios. First ration is stock turnover. This measures how long stock is being held before it is flipd. To calculate stock turnover ratio I need to divide average stock by cost of sales and the multiply it by 365 days. To find Polish Fine Foods stock turnover I need to find the average stock first. The inception stock is 5250 and the closi ng stock is 8500. By adding them two and then divide it by 2, it would give me the average stock which is 6875. thusly I need to divide 6875 by the cost of sales 99500 and it would give me the answer of 0.06909547738. Then if I will multiply it by 365 it would give me the answer 25 days which is the average number of says the stocks are being held before being replaced. If the stock goes out of date and this could happen to Polish Fine Foods as their selling food, stock should be held for a shorter geological period of time. It is a disadvantage to the business if they held stock for a long period of time because it can be expensive and the stock can deteriorate in value. However, a high turnover of stock can be seen as anindicator of a stable business. Polish Fine Foods has a low stock turnover, and this might be because it is a sole trader and it has been opened up recently. Polish Fine Foods can run successfully as they are able to sell their stock in slight time than a month w hich agent that the products dont go out of date by the time they replace the stock. Next ratio Im going to use is debtor aggregation period.This measures how long debtors take to pay. To calculate debt collection period for Polish Fine Foods I need to divide 18000 which is debtors by 145400 being the sales and multiply the answer by 365 days. This gives me the answer 45 days, on average. It means that it takes 45 days for the debtors to pay the business. separate businesses allow the debtors 90 days until they pay the money. For Polish Fine Foods it only takes 45 days which means that is less time, so they wont buttock any financial problems, struggling to get money from the debtors in order to buy near stock. This ratio shows that the business is performing well as they dont face any cash shortage which would reluctant the business down.The last ratio Im going to use in order to measure the performance of Polish Fine Foods is asset turnover. It measures how high the take o f sales are in relation to the assets of the business. To calculate the asset turnover I have to divide the amount of sales by the assets. For Polish Fine Foods the sales amount is 145300 and the assets value is 24500. By dividing them two it would give me the answer of 6. This shows that the business earns more or less 6 in sales for all(prenominal) 1. Knowing all this measurement is really important for the business owner because they can see how they are performing in different areas.ConclusionThis report was written to illustrate the financial state of Polish Fine Foods. So I used accounting rations as evidence to measure its solvency, profitability and performance. First of all, I found out that Polish Fine Foodss current ratio is 1.70. Another ratio I used is the acid test which gave me an answer of 1.20. This is the same as the current ratio however it is a harsher test of ability to settle short-term debts. These ratios tell us that this is a solvent business. This means that it is able to settle its debts when they are due to be paid. If the business is not solvent, then it means that it cant do this. Being solvent helps the business to maintain their confidence and make it operate more successfully. Another set of 3ratios that show us the profitability of Polish Fine Foods are gross profit margin which was 31.56%, net profit margin being 10%, then ROCE which is 60%. any these ratios show how well the business is running. Also, whether they are making any money and how moneymaking it is compared with other competitors. From all these ratios, I have found out that Polish Fine Foods is doing well at the moment.They are making overflowing profit to keep their business going, as they didnt make any loss. Lastly, I measured the performance of Polish Fine Foods using 3 ratios stock turnover which was 6875 then it was debt collection period which was 45 days on average, and then the asset turnover which was 6. Each of these ratios measure different se gments of a companys overall performance. These ratios look at how efficiently and effectively Polish Fine Foods is using its resources to generate sales and increase profit. This is important for the business because Ania can notice any unusual fluctuations in the financial ratios over time and can see how the business is performing. This could also help Ania decide whether or not to grow her business and turn it into a LTD as it would give her enough information to see if she is financial stable to do so.