HERTFORD LTD

Hertford Ltd-Financial Analysis

Introduction2

Description and Justification of Ratios2

Calculations4

Actual & Budgeted Ratios4

Variance Analysis- Hertford Ltd8

Findings9

Conclusion & Recommendation10

References12

Hertford Ltd-Financial Analysis

Introduction

Every business is interested not only in knowing the performance but also the ways to improve its performance (Peterson & Fabozzi, 2012). Since, the global competitive pressure has been increasing on the companies i.e. businesses are forced to improve their performance in order to sustain for the long term. This report evaluates the performance of the Hertford Ltd using the two main tools of analysis namely ratio analysis and variance analysis. Ratio analysis is extremely important not only for the investor perspective but for the company itself (Palepu et. al, 1996). Ratio analysis thoroughly evaluates the company on different aspect such as liquidity, profitability, solvency, asset management, interest coverage and many other aspects including P/E.

Variance analysis is another tool to critically evaluate the performance of the company by comparing budgeted performance with actual performance. This helps management to understand the variances in the actual and budgeted performance of the company. Moreover, it clearly defines whether the variance is favorable or not. It also illustrates variance in two aspects quantity variance or price variance. Another important reason of using the variance analysis in this report is that it provides additional information that is of help identifying causes of these differences. This report critically evaluates the financial performance and position of Hertfort Ltd using these two techniques.

Description and Justification of Ratios

Liquidity, profitability, solvency, asset management ratios along with operating ratio are used in the report. Since, for every business these ratios are the most important angles to be analyzed by using the information provided in the balance sheet and profit & loss statements. In these four categories of ratios, there are different types of ratios which are covered in each particular category. Below is the justification and description of each ratio used in this report:

1. Liquidity ratios

These are the important ratios when it comes to identity the company's ability to meet its short term obligations. These ratios involve the balance sheet items which include cash, marketable securities, inventories and other current assets items. Similarly, it also includes the current liabilities as well as the total assets. It's necessary for the company to meet its short term debts by efficiently working on the cash conversions cycle of the company (Bhimani, 2006). Following are the main ratios used in this category:

Current ratio

Quick ratio

Net working capital

2. Profitability Ratios

This ratio is used in the report in order to evaluate the ability of the company to generate the earnings relative to assets and sales. Since, it highly important for the company to efficiently utilized its assets to earn the better earnings. That's why this ratio has been used in this report. Most importantly different types of profitability ratios are used in this report which highlighted different insights on the financial health and performance of the company. These included:

Operating profit margin

Basic earning power

3. Debt Ratio

This is used to determine the long term ability of the business to meet its long ...