Financial Analysis of Essakane Inc and Westwood Inc

Financial Analysis of Essakane Inc and Westwood Inc

Introduction

Impressions Adco Corporation is a global company that operates in the Information technology sector. It is headquartered in New York, America. It designs, manufactures and distributes computers across the globe using its subsidiaries. In this assignment, the performance of its two subsidiaries that are based in UK namely, Westwood Inc and Essakane Inc is evaluated using various accounting ratios.

Discussion

Financial Ratios

The financial ratios are also known as the accounting ratios. These ratios are calculated to form a relationship between the balance sheet and the profit and loss statement (www.oocities.org). There are five main categories of financial ratios that are used to evaluate a firm's performance (Riley 2012, n.d.). Each of these categories along with the various ratios in each of them that will be used to evaluate the company's subsidiaries is given below (www.pearson.ch).

Liquidity Ratios

Liquidity ratios determine the ability of a firm to meet its short term financial liabilities. It is also known as the solvency ratio. There are two types of liquidity ratios. Each of those ratios is explained separately.

Current Ratio

Current ratio determines the firm's capacity to pay its short term debts from the current assets that will be converted into cash soon. The ratio of less than 1 creates concern for the company as well as the short term debtors of the firm.

Current Ratio = Current Assets / Current Liabilities

Quick Ratio

The quick ratio also known as the acid test ratio determines the relationship between the quick assets and the current liabilities of a firm. This helps in determining a company's capacity to pay it short term debts by excluding those current assets that are not cash or near cash. The ratio of less than 1 causes concern.

Quick Ratio = Quick Assets / Current Liabilities

Profitability Ratios

Profitability ratios help to determine whether the company is making a profit and that too at an acceptable rate. The profitability ratios that will be used to determine the firm's performance are as:

Gross Profit Ratio

This ratio helps to determine whether the company has controlled its production cost. This ratio is very important because even a small change can lead to huge changes in the profit of the company. A high gross profit margin is considered to a good sign.

Gross profit ratio = Gross Profit / Net Sales

Operating Profit Ratio

This ratio helps to determine the relationship between the operating profit and the net sales of a firm.

Operating profit ratio = Operating profit / Net Sales

Return on Capital Employed

Return on capital employed (ROCE) helps to determine how efficiently a firm has used its resources.

ROCE = Net profit before interest, tax & dividend / (total assets - current liabilities)

Efficiency Ratios

These ratios help to determine how efficiently the firm is using it resources which include its fixed assets and working capital.

Sales to Fixed Assets

This ratio helps to determine the capacity of fixed assets.

Sales to Fixed Assets = Sales ...