Finance论文模板 – A Report on the Past Performance of Electrical Spares Ltd

Introduction

Vertical analysis entails comparative examination of financial statements. It expresses every line item as a proportion of another item. This implies that each line item listed on the income statement is expressed as a proportion of the gross sales, whereas each line item listed on a balance sheet is expresses as a proportion of the total assets (Helfert & Helfert 2011, 86).Vertical analysis shows the relative percentage of account balances. It is also used in timeline analysis, which encompasses comparable variations in accounts over a specific period.

Horizontal analysis indicates variations in the quantity of equivalent financial report items over a specific duration. It is also used to analyze the financial situations.

Trend analysis involves computing the proportional change for a single account over a specific duration usually 2 years and above.  It assesses the firm’s financial statements over a specific duration. It computes and analyzes the proportion of variation from one duration to the next.

Ratio analysis refers to the process of mathematically comparing financial statement accounts. They ar used to make a comparison of diverse firms in dissimilar industries. In addition, some firms use ratios to make comparison of their financial information. Ratio analysis enables firms to perform comparison across industries in order to establish their weaknesses and strengths.

Part 2

 Fixed asset turnover is the fraction of net sales to fixed assets. It determines the amount of revenue yielded per every dollar of spent on fixed assets. It also shows a firm’s capacity to produce net assets from net fixed assets such a equipments, plant and property (Chesnick 2010, 78). A greater fixed asset ratio shows that the corporation has been more efficiently and effectively utilizing fixed assets to produce revenues. Further, it makes a comparison of sales revenue of a firm to its fixed assets. Besides, it illustrates the performance of fixed assets in producing revenue. A greater value of fixed asset turnover indicates that a firm is efficiently and effectively handling its fixed assets.

There is no generally accepted best figure for asset turnover ratio. Thus, it is imperative to evaluate the asset turnover ratio over time for the same corporation. This comparison indicates whether the corporation’s performance is improving or worsening over years. It is also vital to make a comparison of the asset turnover ratio of other corporations in the same industry. The comparison shows whether the corporation is performing worse or better than others.

An augmenting trend in fixed asset turnover ratio is preferable since it implies that the corporation has less financial resources held up in fixed assets for every unit of sale. A decreasing trend in fixed asset turnover ratio show that the firm is over spending in the equipment, plant and property. The ratio ought to be utilized in the analysis of subsequent periods financial data in order to indicate how effective and efficient the investment in long term assets has been.

A low fixed turnover ratio indicates that the fixed assets are underused. It may also suggest that the company have more fixed assets than the quantity that can be efficiently and effectively utilized. On the other hand, an extremely great fixed asset turnover ratio may indicate that the performance of the company is carried out at peak efficiency. Besides, a high value of fixed asset turnover ratio may imply that the firm is operating at full performance or it requires an upgrade or more capital investment.

When fixed asset ratio is small compared to the past years ratio for the corporation or industry, the amounts of sale are low or financial resources spent on fixed assets are too high. The higher the value of fixed asset ratio turn over, the better, since it suggests that the corporation has less financial resources  held up in fixed assets  for every unit of money of sales revenue (Morley 2014, 4).

Gross profit margin is financial metric employed to analyze the corporation’s financial health by indicating the percentage of money remaining from revenues after deducting cost of goods sold. It is used to settle extra expenses and prospective savings. It is can also be defined as the proportion of gross profit to sales revenue. Gross profit margin shows the profitability of a business firm. It also indicates how effectively and efficiently a business firm utilizes labor, materials, and resources. It illustrates the profitability of a business a firm before overhead cost; it assesses how well a business firm controls its costs (Fridson & Alvarez 2012, 80).

Besides, gross profit margin is used to assess the distribution and manufacturing efficiency of business during the production process. The greater the value of gross profit margin, the better the business entity controls costs (Wallin 2012, 4).

Administration expense to sales enables analysts to comprehend the quantity of overheads needed to support a particular level of revenues. This ratio ought to lessen over time as a business entity gains economies of scale. It reveals how well a business firm utilizes its assets in business operations.  This ratio is tracked overtime, as it indicates the quantity of overhead expenses linked to a particular level of sales. Business entities with administrative expense to sales ratio that lessens as sales volume reduces are preferred.

Distribution costs to sales are used to establish the relationship between distribution cost and sales volume. It shows the proportion of sales which is used by distribution expenses.

Net profit Margin is the proportion of revenue remaining after deducting preferred stock dividends, taxes, interest and operating expenses from the firm’s total revenue. It indicates the capacity of the business firm in turning revenue into profits (O’rourke 2012, 4). A decrease in net profit margin over time is linked to inadequate expense management, decreasing sales and poor customer experience.

Current asset ratio indicates the business firm’s ability to settle short term obligations with its current assets.  The greater the ratio, the higher the capability of the business entity of setting its short term obligations. A ratio of 1 indicates that the business firm is not in a position to settle its obligations if they came due at the time (Helfert 2013, 76).

Acid test ratio shows that the business firm has enough current assets to cover instant liabilities without disposing inventories. Corporations with acid test ratio of less than 1 are not in a position to pay for current liabilities.

Mark up is the proportion of profit to the cost of goods.

Stock turnover ratio indicates the number of time a business firm’s stock is disposed off and substitute over time.

Trade collection period refers to the approximate number of days taken by clients and customers to pay for receivables (Sanzo 2010, 84).

Trade payable period refers to the standard number of days in which a business entity pays its suppliers.

Return on capital employed indicates how several dollars in profits every dollar of capital employed yields.

Part 3

Fixed asset turnover increased from 1.3 times in 2012 to 1.5 in 2013. However, it decreased between 2013 and 2014 to 1.1 times. The decreasing trend between 2013 and 2014 suggests that Electrical Spares Limited is overspending on fixed assets (Mott 2013, 94). On the other hand, an increase in fixed asset turnover ratio between 2012 and 2013 indicates that the corporation is under spending on fixed assets.

Gross profit margin decreased from 19.6% to 13 percent between 2012 and 2013 indicating a reduction in productivity. The ratio increased to 15.5 percent between 2013 and 2014 showing an increase in profitability.

Administration expense to sales decreased from 9 percent in 2012 to 6.3 percent in 2013. The ratio decreased further to 5.5 percent in 2014.

Distribution cost to sales increased from 5 % in 2012 to 7.3 percent in 2013.  Further, the ratio increased to 12.9 percent in 2014. An increase in expense to sales ratio is an indication of lower profitability since fewer expenses are incurred to yield sales (Sanzo 2012, 45). A higher expense ratio suggests a reduction in profits. The profitability of the Electrical Spares Limited company decreased between 2013 and 2013 as well as between 2013 and 2014. This implies that the profitability of the company augmented over the three years.

Net profit Margin increased from 9.9 percent in 2012 to 12.3 percent in 2013. However, it reduced to 11.1 percent in 2014. The profitability of company improved by 2.4 percent between 2012 and 2013 and deteriorated between 2013 and 2014 by 1.2 percent between 2013 and 2014 (Horrigan 2013, 87).

Current asset ratio increased from 1.23 in 2012 to 1.26 in 2013.However, the ratio reduced to 1.22 in 2014. A current asset ratio of 1.23 indicates that short term assets are able to cover 1.23 times the quantity of the business entity’s short term liabilities.  Electrical Spares Limited improved its liquidity position between 2012 and 2013 by 0.03 and deteriorated its liquidity position between 2013 and 2014 by 0.04 percent (Horrigan 2013, 67). During this period, the business entity experienced bent over of working capital cycle due to implementation of more effective management practices.

Acid test ratio increased by 0.11 from 2012 to 2013 and reduced in 2014 by 0.06 frm 2013 to 2014.

Mark up remained constant between 2012 and 2013 and increased by 4.7 percent from 2013 to 2014 (Strunk et. al., 2014, 65). Electrical Spare Limited’s profitability remained constant between 2012 and 2013 and improved between 2013 and 2014.

Stock turnover ratio increased from 15.0 times in 2012 to 16.9 times in 2013. However, it reduced in 2014 to 15.5 percent. A greater value of turnover ratio shows optimal utilization of stock . The Electrical Spare Limited improved its efficiency in controlling its merchandise between 2012 and 2013 by 1.9 times and reduced its effectiveness in selling stock it purchases between 2013 and 2014 by 1.4 times.

Trade collection period increased by 4 days from 41 days in 2012 to 45 days in 2013. It also increased by 6 days in 2014 (Palmer 2013, 89). A lower trade collection period shows faster receivable collection. The Electrical Spares Limited business entity took less period between 2013 to 2014 than between 2012 and 2013 to convert receivables into cash.

Trade payable period increased by 3 days between 2012 and 2013. Nevertheless, it decreased between 2013 and 2014 by 4 days. A greater payable day enables business entities to obtain optimal advantage of credit. The Electrical Spares Limited company took slightly less duration to pay its suppliers between 2013 and 2014 than between 2012 and 2013. The creditors were unhappy with the manner in which the company settled their credit between 2012 and 2013 and refused to extend credit between 2013 and 2014.Additionally, the creditors offered less favorable conditions to the company.

Return on capital employed increased by 2.4 percent between 2012 and 2013. Nevertheless, the ratio decreased by 1.5 percent between 2013 and 2014. The Electrical Spares Limited profit yielded by every dollar of capital employed increased by 2.4 percent between 2012 and 2013 and diminished between 2013 and 2014 by 1.5 percent (Helfert & Helfert 2011, 67). Each dollar spent in capital employed, earned $0.5 more between 2012 and 2014 than in 2013 and 2014.

Part 4

Current asset ratio need to be compared with market average current ratio overtime (Hansen & Palmer 2014, 8). If Electrical Spares Ltd. Would have lower current ratio than the market, the firm would be considered to be more risky than when the ratio would be below the average. The Electrical Spares Ltd needs to analyze their working capital considerations and the level of risk it is able to accept when ascertaining the desired current ratio for the business firm (Dc Gardner 2010, 78). A higher current ratio than the industry average is an indication of insufficient utilization of resources held up in the working capital of electrical Spares Ltd. A lower value of current asset ratio than market average may show risky strategy that could pose liquidity problems for the business entity.

The net profit margin needs to be compared to similar ratio for the market reader or industry average. A net profit margin can be outstanding for one firm and mediocre for another.

Fixed asset turnover ratio of other firms in the industry are imperative for a better analysis. When making a comparison of fixed asset ratios, it is vital to remember that the figures for net fixed assets are recorded in book values, which can be very dissimilar from market figures.

List of references

DC GARDNER GROUP. (2010). Ratio analysis. DC Gardner Group plc.

PALMER, J. E. (2013). Financial ratio analysis. New York, N.Y., American Institute of Certified Public Accountants.

SANZO, R. (2012). Ratio analysis for small business. Washington, D.C., Small Business Administration,Office of Management Information and Training.

HORRIGAN, J. O. (2013). Financial ratio analysis: an historical perspective. New York, Arno Press.

STEFFY, W., ZEARLEY, T., & STRUNK, J. (2014). Financial ratio analysis: an effective management tool. Ann Arbor, Industrial Development Division, Institute of Science and Technology, University of Michigan.

HANSEN, B. G., & PALMER, A. J. (2014). FRAN, Financial Ratio ANalysis and more. Radnor PA (5 Radnor Corp CTR Suite 200, Radnor 19087-4585), U.S. Dept. of Agriculture, Forest

Service, Northeastern Forest Experiment Station.

HORRIGAN, J. O. (2013). An evaluation of financial ratio analysis. Chicago, University of Chicago.

SANZO, R. (2010). Ratio analysis for small business. Washington, Small Business Administration; [for sale by the Supt. of Docs., U.S. Govt. Print. Off.].

MOTT, S. S. (2013). Ratio analysis workbook: easy step-by-step solution to your credit problems.

New York, N.Y., Publications Division, National Association of Credit Management.

HELFERT, E. A. (2013). Techniques of financial analysis. Homewood, Ill, Irwin.

WALLIN, J. (2012). Financial ratio analysis and mathematical programming: pattern recognition models for default risk assessment. Helsingfors, Swedish School of Economics and Business Administration.

CHESNICK, D. S. (2010). Financial management and ratio analysis for cooperative enterprises. http://purl.fdlp.gov/GPO/gpo45666.

FRIDSON, M. S., & ALVAREZ, F. (2012). Financial statement analysis a practitioner’s guide. New York, John Wiley & Sons. http://www.books24x7.com/marc.asp?bookid=3775.

O’ROURKE, V. (2012). The usefulness of financial ratio analysis for discrimination of small business credit risks.

MORLEY, M. F. (2014). Ratio analysis. Berkshire, England, Published for the Institute of Chartered Accountants of Scotland by Gee & Co.

HELFERT, E. A., & HELFERT, E. A. (2011). Financial analysis tools and techniques : a guide for managers. New York, McGraw-Hill. http://site.ebrary.com/id/5003495.

Scroll to Top