FINANCIAL RATIOS

Financial Ratios

Crosville Motors Ltd

Introduction

Companies' performance evaluation generally based on how substantially companies could utilize their assets, liability, share holders equity, expense and revenues. For any company, financial ratio analysis is considered one of perfect methods for performance evaluation. For determining the financial position of Transport Company and to construct a recommendation regarding how well transport company i.e. Crosville Motors Ltd can efficiently utilize their asset and debt for higher revenue generation.

Discussion

Ratio Analysis

Ratio analysis helps financial analyst for measuring, comparing and evaluating the financial health and condition of the company as well as financial trend of the company (Hossan F., Habib A., 2010, pp. 20).

The most appropriate comparative ratios which can evaluate on Crosville's profitability, efficiency, liquidity, gearing and investment potential are as followed:

Current Ratios: This ratio is used to see the liquidity position of the company and whether company can meet it short term obligation immediately or not.

Debt to Equity Ratio: This ratios measure financial leverage of the company i.e. how much company is in debt and how much company's owner has invested their own money.

Net Profit Margin: Profitability of the company is measure through this ratio as it shows profit percentage that business generates for every revenue dollar.

Inventory Turnover: The efficiency of the company is reflected through this ratio as shows conversion of the inventory into sales (Kumbirai M., Webb R., 2010, pp. 30).

Return on Owner's Equity: It indicates how effectively the company is generating money from investors' money.

Crosville Motors Ltd

Ratio

Ratio Formula

2010

2011

Current Ratio

Current Assets / Current Liabilities

103, 000 / 40, 000

2.575

100, 000 / 67, 000

1.492

Debt to Equity Ratio

Total Debt / Total Equity

40, 000 / 103, 000

0.3883

(67, 000 + 25, 000) / 115, 000

0.8

Net Profit Margin

Net Income/ Sales Revenue

9, 000 / 390, 000

0.0231

25, 000 / 430, 000

0.058

Inventory Turnover

Cost of Goods Sold / Inventory

260, 000 / 55, 000

4.7273

270, 000 / 65, 000

4.153

Return on Owner's Equity

Net income / Shareholder equity

9, 000 / 103, 000

0.0874

25, 000 / 115, 000

0.217

Analysis of Ratios

The above financial ratios of Crosville Motors Ltd showing that company is not so much liquid, leverage has been increased, profitability has been improved turnover are deteriorating while retrain on equity is also over leveraged from last year.

Current ration shows financial health of the company with respect to the money available. In 2010, company CR was 2.5 which state that company can meet or pay 2.5 times it short term obligation (payment) while it was 1.49 in 2011 which state that now company can only meet 1.49 time of it shot term obligation or payment of short term debt. Hence, as it is reducing, it is not a good indicator from investors' point of view as well as creditors' point of view. Hence, company should either increase their sales as it was reduced in 2011and they should invest in profitable projects. Furthermore, it is recommended to company that they should manage their account receivable as it has been increased in 2011. This is also the reason why companies so not have ...