PERFORMANCE OF A COMPANY

Assessing the Performance of a Company



Assessing the performance of a company

Question 1

Define and calculate the following financial ratios for both 2011 and 2012 (using year-end figures for balance sheet terms):

Return on capital employed

Operating profit margin

Gross profit margin

Current ratio

Acid test ratio

Settlement period for trade payables

Settlement period for trade receivables

Answer

Current Ratio

Current ratio is also known as cash ratio, cash asset ratio, liquidity ratio. This ratio is calculated by using the formula CR=CA/CL. the prime objectives of this ratio are that is provides effective information regarding company ability of repaying its short-term obligations with the help of cash of the company, short-term investment (bringham & Ehrhardt, 2011).

The current ration of G Company for the year 2012 is 1.74 as compare to 1.86 in year 2011. This indicates a slight decrease in the current ration that means that company is facing few problems in gathering optimal amount of current assets for example cash. Slight decrease is not a worrying sign for the company as it is still above one that represents sound financial condition of the company. Further, the current ration of the company is way behind the industry current ration and this means that company is not performing according to the standards set by the industry and is facing tough competition.

Acid-test ratio

This ratio is the prime indicator that represents company's ability of paying of its short term liabilities without selling of its inventory. This ratio is calculated using formula.

Acid-test ratio = Current assets/Current liabilities

The company acid-test ratio for the year 2012 is 0.46 percent as compare to 0.64 in 2012. Like current ratio, a slight decrease in this ratio from previous year, and is lower than market ratio. This decrease indicates that company is facing a slight difficulty in paying of short term payments, and there is a strong possibility that in future company might require to sell inventory for the timely payment of short-term liabilities (Gibson, 2010).

Debt ratio

This ratio indicates company's debt percentage as compare to its assets structure. This ration clearly indicates company debt position and potential risk company might face regarding payment of debt, or increase in debt ratio. The company debt ratio for the year 2012 is 30.26% as compare to 28.34% in 2011. This increase in debt ratio indicates that company has taken extra loan from financial institutions, which has increase the tension of paying off debt by keeping the performance of the company in float (Peterson & fabozzi, 1999).

Time interest earned ratio

This ration provides the information regarding company's ability of paying of its debt, further, if a company has failed to pay of its obligation that there is strong possibility of bankruptcy. Time interest earned ratio of the company for 2012 is 74.02 as compare to 31.12 in 2011. This increase in ratio indicates that company is progressing extremely well in the market and is in strong position of paying of all of its long-term debt on time.

Return on Sales

This ration is generally used to analyze the efficiency of the company in ...