Financial Management



Financial Management

1. Use information given in the extracts from financial statements of Edcon and Woolworths to the questions that follow. The extracts are attached hereto for your reference.

1.1 Calculate the following ratios for both companies:

1.1.1 Current ratio (2 marks)

1.1.2 Quick (acid test) ratio (2 marks)

1.1.3 Total debt ratio (2 marks)

1.1.4 Debt equity ratio (2 marks)

1.1.5 Gross profit margin (2 marks)

1.1.6 Return on equity (2 marks)

Financial analysis is an integral part of the decision making process. Analyzing the financial stability of the hotel is immensely important to determine as to how effectively is the hotel operating. Financial performance refers to the methodical evaluation of the financial situation of an organization, person or a project. Several methods of financial analysis exist; however, ratio analysis is considered the most efficient in determining the financial position and performance of an organization.

A detailed financial analysis of the two organizations is provided here onwards, which encompasses various aspects of financial information. Financial ratio analysis will cover the liquidity, gearing and profitability ratios. (Guilding, 2002, pp 64 - 87) The financial ratio analysis of Edcon Holdings Limited and Woolworths Holdings Limited is presented on the next page.

Liquidity Ratios

Liquidity ratios enable the organizational management to analyze their position to meet the day-to-day requirements of the organization and to pay off its short-term debts. These include current ratio and quick ratio. (Medlik & Ingram, 2000, pp 137 - 141) The ratios of the two organizations are calculated on the next page.

Edcon Holdings Limited

Current Ratio = Total Current Assets / Total Current Liabilities

Current Ratio = 12,510/ 5,548

Current Ratio = 2.255 : 1

Quick Ratio = (Total Current Assets - Inventory)/ Total Current Liabilities

Quick Ratio = (12,510 - 2,402) / 5,548

Quick Ratio = 1.821 : 1

Woolworths Holding Limited

Current Ratio = Total Current Assets / Total Current Liabilities

Current Ratio = 5,073/ 3,726

Current Ratio = 1.361 : 1

Quick Ratio = (Total Current Assets - Inventory)/ Total Current Liabilities

Quick Ratio = (5,073 - 1,837) / 3,726

Quick Ratio = 0.868 : 1

Gearing Ratios

Gearing, also termed as leverage, portrays the organizational financing policies. It reflects the way an organization raises funds for investments and other organizational purposes. Gearing ratios includes debt to assets ratio and debt to equity ratio. (Guilding, 2009, pp 74 - 79)

Edcon Holdings Limited

Total Debt to Assets Ratio = Total Debt / Total Assets

Total Debt to Assets Ratio = 35,357 / 33,768

Total Debt to Assets Ratio = 1.047 or 104.7 %

Total Debt to Equity Ratio = Total Debt / Shareholder's Equity

Total Debt to Equity Ratio = 35,357 / (1,589)

Total Debt to Equity Ratio = -22.25 or -2225%

Woolworths Holding Limited

Total Debt to Assets Ratio = Total Debt / Total Assets

Total Debt to Assets Ratio = 5,026 / 8,752

Total Debt to Assets Ratio = 0.574 or 57.4%

Total Debt to Equity Ratio = Total Debt / Shareholder's Equity

Total Debt to Equity Ratio = 5,026 / 3,726

Total Debt to Equity Ratio = 1.349 or 134.9%

Profitability Ratios

Profitability ratios explain the performance of an organization in terms of the profit it earns. They include gross margin and return on ...