FINANCIAL ANALYSIS

Financial Analysis



Task 1

Question 1

A company's financial statements for a single accounting period can reveal important information about its performance and financial health. But comparing the financial statements of more than one period can provide better context and help identify any changes that may signal strengths or weaknesses. We can compare financial statements for more than one period by using horizontal analysis. With horizontal analysis, we compare the dollar change and the percent change of each item on a financial statement for two consecutive periods. A financial statement showing horizontal analysis of two consecutive periods is called a comparative financial statement (Berezin, 2005, 78-106).

The above table shows the vertical and horizontal analysis of Smith Plc. In 2010, the cost of sales is 67.6% of total sales, which is .6% less than previous year cost of goods sales that was 68.2%. Therefore, Smith plc has improved in this area in 2010. Moreover, the sales revenue has also increased by 23.55 since last year 2009. The improvement in these two areas has led company to increase its gross profit. Gross profit percentage to sales is 32.4% in 2010, whereas it was 31.8% in 2009. Overall gross profit has increased by 22.4% in 2010. Expenses of Smith plc remained lower in 2010 than 2009, which led the company towards more profitability. Profit before tax is 10.5% in 2010 that was 8.8% in 2009 and has increased by 45.7%. Similarly, profit after tax also has increased by 50% in 2010. The overall performance of the company has improved in 2010.

Above table shows the vertical and horizontal analysis of Smith plc. If we focus on the big picture, net worth of the company has increased in 2010. Total fixed assets are 57.6% of total assets in 2010, which were 67.7% in 2009. This is due to the depreciation factor. Total current assets are 42.4% in 2010 and have increased by 40%. This can be treated in two ways i.e., weakness and strength. It is weakness because company has stuck it resource into inventory and debtors, which can be utilized to generate more sales and greater profits. On the other hand, increase in current asset has improved the liquidity position of the company in 2010. Now, the company has more liquid assets (as compare to last year) to pay short term loans. Share holder equity has increased in 2010 but long term liabilities remained same.

Ratio Analysis

Smith Plc Ratios

Profitability Ratio

The most common profitability ratios used for retrospective analysis are gross profits and net profits. Gross profits represent the amount of money that a business earns from its core operation and is calculated by subtracting cost of goods sold --- materials, labor and supplies --- from total sales. Net profit is the amount left after subtracting fixed overhead expenses from gross profits.

The overall profitability of Smith plc has improved in 2010. Gross profit (percentage to sales) is 32.4% in 2010, whereas it was 31.8% in 2009. Overall gross profit has increased by ...