Ratio analysis Essay

proportion analytic thinking is a gumshoe brought by individuals practice sessiond to respect abbreviation of information in the financial split inments of a patronage. The balance analysis forms an each(prenominal) classic(p) part of the financial analysis which is a vital part in the headache planning. There be 3 different ways of assessing transaction organizationes functioning and these ar solvency, earningsability and proceeding. Ratio analysis assists managers to work let on the proceeds of the comp all by figuring the meshability balances. Also, the management elicit evaluate their revenues to check if their productivity. Thus, probability ratios be helpful to the caller-out in evaluating its writ of execution based on au and sotic earning. By measuring the solvency ratio, the companies be sufficient to keep an eye on the correlation between the pluss and the liabilities.If, in any case, the liabilities exceed the as bands, the company is satis factory to know its financial position. This is helpful in case they wish to set up a plan for bestow re pass onment. Ratio analysis is in any case helpful in analysing the performance of a company. Through financial analysis, companies buttocks review their performance in the early(prenominal) course of studys. This is also helpful in identifying their weaknesses and improving on them. stopping point lovely Foods trains to example ratio analysis beca employ it is a valu adequate withall for the business sector enterprises management to determine the performance of a business and to control the cost measures when necessary. Also, ratio analysis helps them monitor and identify issues that stand be highschoollighted and resolved. However, ratio analysis doesnt take into method of accounting apart factors such as a worldwide recession.Measuring the Solvency of semblance bonny FoodsNow, I will use 2 rations to measure the solvency of snipe bewitching Foods. First, I will channelise the current ratio for nuance hunky-dory Foods. This estimates whether the business domiciliate pay debts due within one year from pluss that it expects to turn into cash within that year. It is measured dividing current assets by the current liabilities. By looking at balance sheet I can see that colour first-rate Foods current asset value is 28500 and the current liability value is 17000. I will call for to turning point 28500 by 17000 to rally out the current ratio. This would give me an upshot of 1.7. This means that for each 1 owned they nurture 1.70 current asset. The render should normally non fall below 1.5. If it reaches a value of 1 because there big businessman be concerns there about not world able to meet the debts of the short assets. However, we can see that Polish fair Foods current ratio tells us that this is a solvent business. This means that it is able to sink its debts when they are due to be paid. If the business is not solvent, then it means that it cant do this. Being solvent would help the business to maintain their confidence.On the separate hand, if the current ratio goes higher than 2 magnate indicate that too much finance is tied up in a short-term assets, which can result that not too much money are being keep within the organisation. Secondly, I will measure the sulphurous run. This is the same as the current ratio however it is a harsher test of ability to settle short-term debts. It is more(prenominal) accurate as it takes away the furrow and shows how surface a business can meet its current liabilities. To find out the acid test I first occupy to subtract investment trust from the current assets and then carve up the current liabilities by the act of that. So Polish finely Foods count of sway is 8500 from the current assets which is 28500. The answer of the subtraction is 20000. Now I would need to divide the answer by the current liability which is 17000 which would giv e me the terminal acid test ratio of 1.20.This calculation removes the uncertain variable of mental strain, which might be not too important to the business. Similarly, this data shows us that Polish Fine Foods is a solvent business and it has the ability to meet its short-term debts. The business could continue to operate as it is soon looking to be masteryful. With the current ratio of 1.70 and the acid test of 1.20 Polish Fine Foods is a stable business. It is a healthy figure and shows that the business is in a good position. We can see that 0.50 was tied up in stock and this is not a lot. Both rations show that the business is able to pay for its debts and they can also earn more income which means that the business would gave more lucre as the business is solvent.Measuring the Profitability of Polish Fine FoodsProfitability ratios show a companys overall strength and performance. To measure the crystalliseability of Polish Fine Foods I will use 3 ratios. First ratio is gross earnings gross earn. The gross turn a gain ground margin looks at cost of goods sold as a character of gross revenue. This ratio looks at how well a company controls the cost of its account and the manufacturing of its products. The larger the gross profit margin, the better for the company. To calculate the gross profit margin I need to divide the gross profit by the gross revenue and then clipping it by 100 to find the percentage. So, to find the gross profit margin for Polish Fine Foods I have to divide 45900 by 145400 and this would give me the answer 0.3156. To find out the percentage, I now need to multiply it by 100 and the answer is 32%. The gross profit margin for Polish Fine Foods is used to comparison how much value is added to an item in between being bought in as stock or materials and being sold by the business.A low gross profit margin could show that there are high stock cost or maybe that retail footing is being too low. If the business has a hig h gross profit margin then it indicates that the business is financial stable. We can see that Polish Fine Foods doesnt have a high gross profit margin- it is a bit more than a quarter. This means that the business is in a secure position. They could be more successful if they are pass to try and cuckold all the stock they have first or else of getting other, so in this way the profit might increase. side by side(p) ratio that Im press release to use in secernate to measure the profitability of Polish Fine Foods is solve profit margin. The sack up profit margin shows how much of each sales amount shows up as net income after all expenses are paid. The net profit margin measures profitability after consideration of all expenses including taxes, interest, and depreciation. To calculate the net profit margin I need to divide the net profit by the sales and then multiply by 100.Therefore, to find the net profit margin for Polish Fine Foods I need to divide 14500 by 145400 and thi s would give me an answer of 0.0997. So after multiplying the answer by 100, I got 10% which shows the amount of net profit margin. This ratio is used to decide which of a range of products are worth continuing with. A low net profit margin might indicate that cost are too high. Polish Fine Foods net profit margin is quite low, so they could try to improve this by trying to sell the stocks first and then get other instead of buying a great deal of them at once which would get more money out. At the moment, the business is in a stable position, but they should try and reduce their be in order of battle to increase the profit theyre making. Lastly, I would use return on capital employed (ROCE) ratio to measure Polish Fine Foods profitability. This is the percentage return which makes the business able to generate the long capital employed.To calculate ROC, I need to divide the net profit by the capital employed and then multiply it by 100. Therefore, to ok the ROCE for Polish Fine Foods I need to divide their net profit which is 14500 by the capital employed which is 24500 this will then give an answer of 0.591, and then multiply that by 100. The final answer for ROCE is 60%. This ratio has been used to show how efficiently a business is using its capital. The ROCE shows us now that Polish Fine Foods is doing well at the moment and they are using their money carefully. Polish Fine Foods overall has good ratios that currently keep them stable. Basically, all these ratios show the amount of profit generated by the company as a per cent of the sales generated. The objective of margin analysis is to detect consistency or positive or negative trends in a companys earnings. Polish Fine Foods is doing well, and looks like it is a stable business. However, there is still place for improvement, e.g they could try and reduce their costs and increase their profits.Measuring the Performance of Polish Fine FoodsA suppuration business needs to be closely and careful ly managed to ensure the success of new investment and expanding plans. Putting performance measurements in place can be an important way of keeping track on the happen of their business. It gives vital information about whats happening now and it also provides the starting point for setting targets that will help owner apply their plans for growth. Now I will measure the performance of Polish Fine Foods using 3 ratios. First ration is stock perturbation. This measures how long stock is being held before it is replaced. To calculate stock turnover ratio I need to divide average stock by cost of sales and the multiply it by 365 old age. To find Polish Fine Foods stock turnover I need to find the average stock first. The opening stock is 5250 and the closing stock is 8500. By adding them two and then divide it by 2, it would give me the average stock which is 6875.Then I need to divide 6875 by the cost of sales 99500 and it would give me the answer of 0.06909547738. Then if I will m ultiply it by 365 it would give me the answer 25 days which is the average number of says the stocks are being held before being replaced. If the stock goes out of date and this could happen to Polish Fine Foods as their merchandising food, stock should be held for a shorter period of time. It is a disadvantage to the business if they held stock for a long period of time because it can be expensive and the stock can deteriorate in value. However, a high turnover of stock can be seen as an indicator of a stable business. Polish Fine Foods has a low stock turnover, and this might be because it is a sole trader and it has been opened up recently. Polish Fine Foods can run successfully as they are able to sell their stock in less time than a month which means that the products dont go out of date by the time they replace the stock. Next ratio Im going to use is debtor show period.This measures how long debtors take to pay. To calculate debt collection period for Polish Fine Foods I need to divide 18000 which is debtors by 145400 being the sales and multiply the answer by 365 days. This gives me the answer 45 days, on average. It means that it takes 45 days for the debtors to pay the business. Other businesses bear the debtors 90 days until they pay the money. For Polish Fine Foods it only takes 45 days which means that is less time, so they wont flavor any financial problems, struggling to get money from the debtors in order to buy some stock. This ratio shows that the business is performing well as they dont face any cash shortage which would slow up the business down.The last ratio Im going to use in order to measure the performance of Polish Fine Foods is asset turnover. It measures how high the level of sales are in relation to the assets of the business. To calculate the asset turnover I have to divide the amount of sales by the assets. For Polish Fine Foods the sales amount is 145300 and the assets value is 24500. By dividing them two it would give me the answer of 6. This shows that the business earns approximately 6 in sales for every 1. Knowing all this measurement is very important for the business owner because they can see how they are performing in different areas.ConclusionThis report was written to illustrate the financial state of Polish Fine Foods. So I used accounting rations as evidence to measure its solvency, profitability and performance. First of all, I found out that Polish Fine Foodss current ratio is 1.70. Another ratio I used is the acid test which gave me an answer of 1.20. This is the same as the current ratio however it is a harsher test of ability to settle short-term debts. These ratios tell us that this is a solvent business. This means that it is able to settle its debts when they are due to be paid. If the business is not solvent, then it means that it cant do this. Being solvent helps the business to maintain their confidence and make it operate more successfully. Another set of 3 ratios that show us the profitability of Polish Fine Foods are gross profit margin which was 31.56%, net profit margin being 10%, then ROCE which is 60%. All these ratios show how well the business is running. Also, whether they are making any money and how profitable it is compared with other competitors. From all these ratios, I have found out that Polish Fine Foods is doing well at the moment.They are making enough profit to keep their business going, as they didnt make any loss. Lastly, I measured the performance of Polish Fine Foods using 3 ratios stock turnover which was 6875 then it was debt collection period which was 45 days on average, and then the asset turnover which was 6. Each of these ratios measure different segments of a companys overall performance. These ratios look at how efficiently and effectively Polish Fine Foods is using its resources to generate sales and increase profit. This is important for the business because Ania can notice any unusual fluctuations in the financi al ratios over time and can see how the business is performing. This could also help Ania decide whether or not to grow her business and turn it into a LTD as it would give her enough information to see if she is financial stable to do so.