Ratio analysis is the mathematical comparison of accounting statements to help the business partners and/or shareholders including investors, customers, creditors and management in making effective business decisions. This is one of the most practical skills that is useful in the accounting and finance domain. Students normally get many different assignments and coursework related to this. Our team has experience of providing accounting assignment help to more than half a million students. Call or email us for any query to firstname.lastname@example.org
Ratio analysis is the process of interpret accounting and financial statements of a firm by determining and analyzing its accounting ratios. It is an effective way to assess the firm’s financial performance and business in terms of profitability, liquidity, efficiency and etc. In this case, ratio analysis is applied to make interpretation of Amway’s financial statement and its financial position. Following is the ratio analysis of Amway in context of different accounting ratios. Our assignment help professors can provide you guidelines and notes to get the assignment done effectively.
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Example of Analysis and Interpretation of Ratios
From the image of ratio analysis of using Amway as case example, it is analyzed that higher profitability ratios shows the sound financial position of the company during the specific periods. Overall, it can be interpreted that a significant improvement in profitability ratio indicates the strong ability of Amway to manage the operations effectively and generate high returns for investors (Gibson, 2012).
Similarly, higher liquidity ratios point out that firm is capable to maintain its liquidity position and repay its short-term obligations effectively. Generally, current ratio is acceptable between 1.5 and 3 for healthy business. But, for Amway, it is more than 3 in 2012 and 2013 that shows the ineffectiveness of the company to use its short-term financing facilities. Due to this, company might experience problems related to working capital management and consequently cash flow management.
From the calculation of efficiency ratios, it can be analyzed that there is a high increase in debtors’ collection period for the company during this period. Through this, it can be interpreted that there is high risk of bad debts for Amway that can cause problems related to cash flows in meeting financial needs for operations. At the same time, there is a significant decrease in creditor payment period during this period. From this, it can be interpreted that business might experience cash flow problem due to paying its bills as soon as possible (Damodaran, 2010). On the other hand, stock turnover ratio also moderately decreased during this period that indicates the ineffectiveness of company to convert inventory into sales that might create problem related to cash flow due to idle stock in stores. Concurrently, increase in asset turnover ratio in 2013 shows the effectiveness of company to utilize the assets more significantly to perform business functions efficiently and generate high sales.
Evaluation of Ratios
From the ratio analysis, it can be evaluated that there is an increasing trend in profitability ratios including gross profit ratio and ROCE from year 2011 to 2013. Increase in gross profit ratio and ROCE indicates that company is operating its business operations effectively to generate high profits by minimizing operating costs. At the same time, net profit ratio is slightly decreased in 2013 as compared to year 2012, but overall there is a significant increase in this ratio that shows company has effective production efficiency to manage its expenses relative to its net sales to make higher margins. It shows that company is doing well than previous years. This information might be useful for the investors to make investment decisions in the company due to its high returns on investment. But, results of profitability ratios cannot be reliable because it is difficult to generalize whether a particular ratio is good or bad without comparing with other firms in similar industry.
On the other hand, liquidity ratios including current and acid test ratios increased with a significant amount from year 2011 to 2013. Increase in liquidity ratios shows that company is performing well from prior years in perspective of short-term financial strength. But, value of current ratio is higher than the ideal ratio of 2:1 that can cause problem regarding operational inefficiency and working capital and other capital budgeting projects. This information can be useful for creditors in making credit decisions (Damodaran, 2010). It has same reliability problem like profitability ratio because it does not give generalized views regarding good and bad ratio.
In addition, debtors’ collection period for company increased from 9.60 days to 19.84 days during the period of 2011-2013. It can provide relaxation to the customers to pay the amount in longer period than prior years, but can also increase bed debts for firm. This information can be useful for the customers to make buying and payment decisions. Creditor payment period fell highly from 25.12 to 17.31 days that means company has to repay its bills to suppliers in lower period to develop trust for further purchasing on credit. This information can be used by the suppliers to make sales decisions on credit. Both debtor collection period and creditor payment period cannot be said reliable because their values vary with the industries and organizational polices (Gibson, 2012).
Stock turnover ratio reasonably decreased from 5.55 to 4.97 that show the ineffectiveness of management to convert inventory into revenues and inefficiency of the business to do well than previous years in terms of production and purchasing efficiency. This information can be reliable and can be used by the management to determine the internal efficiency to manage resources and generate revenues. But it can cause confusion among the shareholders due to resemblance with profitability ratio because some firms are profitable, but they are not efficient with their resources and inventories.
At the same time, asset turnover ratio increased from 1.90 to 2.10 during the period of 2011-2013 that can be useful for the investors to make investment decisions due to effectiveness of firm to effectively utilize assets to generate sales and perform well as compared to prior years. It is reliable with the comparisons of different companies in the same sector. Ratio analysis has some limitations because it cannot provide accurate financial review in situation of adverse economic conditions, seasonal demand and differences in accounting practices (Jones, et.al, 2009).
So, the above analysis show how you should approach your ratio analysis accounting assignments. For further queries, kindly write us to email@example.com
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