Accounting Ratios Profit And Loss In Balance Sheets Finance Essay - Free Essay Example

The accounting ratio is used to describe significant relationship between a balance sheet in a profit and loss account, in a budgetary control system or in any other part of accounting organization. The main aim of business is to earn profit and to remain solvent. The main purpose of accounting ratio is preparing financial statement that will help various external and internal of the business to appraise the profitability as well the solvent of the business. The purpose of accounting is to plan, how much and in areas that company will put its available finances. Accounting ratios are expressed and counted based on the accounting derived from financial statements of the company. Accounting ratios are used to interpret financial statement for measuring the business performance of company. Accounting ratio has five aspects or areas of business measured, which is profitability of company, liquidity of company, assets management of company, debts management and capital gearing of company and also market value of investment to ordinary shareholders / common stockholders. This is a formula of accounting ratio. Profitability of company Gross profit markup Gross profit x 100 Cost of goods sold Gross profit Margin Gross profit x 100 Net sales value Operating profit margin on sales Operating profit before interest/before taxation x100 Net sales value Profit margin on sales Net income available to common stockholders x 100 Net sales value Basic earning power Operating profit before interest/before taxation x 100 Total assets Return on total assets Net income available to common stockholders x 100 Total assets Return on common equity Net income available to common stockholders x 100 common equity Liquidity of company Current ratio Current assets Current liabilities Acid-test ratio Liquid assets Current liabilities Inventory turnover Cost of sales Average stock value Fixed assets turnover Net sales Fixed assets net book value Total assets turnover Net sales Total assets Debtor ratio Debtor Credit sales Day sales outstanding Debtor x 365 days credit sales Debts management and capital gearing of company Debts ratio Total debts Total assets Capital gearing ratio Prior charge debts capital Total capital Debts equity ratio Total debts Common equity Times interest earned or Interest cover Profit before interest and before taxation x 100 Interest charges Creditor ratio Creditor Credit purchase Creditor payment period Creditor x 365 days Credit purchase Market value of investment to ordinary shareholders / common stockholders Earnings per share Net income available to common stockholders Number of ordinary shares in issues Price earnings ratio Market price per ordinary share Earnings per share Dividend cover Earnings per share Net ordinary dividend per share Earnings yield Gross earnings per share x 100 Market price per ordinary share Dividend yield Gross ordinary dividend per share x 100 Market price per ordinary share Price / cash flow ratio Market price per ordinary share Net cash inflow per ordinary share Market price per book value Market price per ordinary share Net book value per ordinary share Inter-temporal Effect of price changes make comparisons difficult unless adjustment are made in inter temporal. Impacts of changes in technology on the price of assets, the likely return and the future markets. Impact of changing environment on the results reflected in the accounting information that potential effect of changes in accounting policies on the reported results. Problems associated with establishing a normal base year to compare other years. Inter-firm Selection of industry norms and the usefulness of norms based on averages. Different firms having different financial and business risk profiles and the impact on analysis. Different firms using different accounting policies. Impacts of the size of the business and its comparators on risk, structure and returns. Impacts of different environments on results, different countries or home based versus multinational firms. 1. Ratio Ratio Formula IJM WCT Gross profit markup Gross profit x 100 Cost of goods sold RM 953,43000 x 100 = 31.16 % RM3,060,100000 RM 354,659000 x 100 = 8.23 % RM 4,311,943000 Gross profit Margin Gross profit x 100 Net sales value RM 953,43000 x 100 = 23.76 % RM4,013,530000 RM 354,65000 x 100 = 7.60 % RM 4,666,602000 Operating profit margin on sales Operating profit before interest/before taxation x 100 Net sales value RM 748,698000 x 100 = 18.65 % RM 4,013,530000 RM 244,145000 x 100 = 5.23 % RM4,666,602000 Profi t margin on sales Net income available to common stockholders x 100 Net sales value RM 332,58000 x 100 = 8.29 % RM 4,013,530000 RM 147,098000 x 100 = 3.15 % RM 4,666,602000 Basic earning power Operating profit before interest/before taxation x 100 Total assets RM 748,689000 x 100 = 5.96 % RM 12,558,295000 RM 244,145000 x 100 = 5.45 % RM 4,478,484000 Return on total assets Net income available to common stockholders x 100 Total assets RM 332,580000 x 100 = 2.65 % RM 12,558,295000 RM 147,098000 x 100 = 3.28 % RM 4,478,484000 Return on common equity Net income available to common stockholders x 100 common equity RM 332,580000 x 100 = 6.48 % RM 5,129,221000 RM 147,098000 x 100 = 11.77 % RM 1,250,246000 Current ratio Current assets Current liabilities RM 5,598,766000 = 2.09 : 1 RM 2,685,225000 RM 2,553,187000 = 1.41 : 1 RM 1,807,55000 Acid-test ratio Liquid assets Current liabilities RM 5,069,446000 = 1.89 : 1 RM 2,685, 225000 RM 2,439,478000 = 1.35 : 1 RM 1,807,550000 Inventory turnover Cost of sales Average stock value RM 3,060,100000 = 5.78 times RM 529,320000 RM 4,311,943000 = 37.92 times RM 113,709000 Total assets turnover Net sales Total assets RM 4,013,53000 = 0.32 times RM 12,558,295000 RM 4,666,602000 = 1.04 times RM 4,478,484000 Debtor ratio Debtor Credit sales RM 2,173,187000 = 0.54 : 1 RM 4,013,53000 RM 1,472,655000 = 0.32 : 1 RM 4,666,602000 Day sales outstanding Debtor x 365 days credit sales 0.54 x 365 days = 197.1 days 0.32 x 365days = 116.8 days Debts ratio Total debts Total assets RM 6,100,936000 = 0.49 : 1 RM 12,558,295000 RM 2,991,508000 = 0.67 : 1 RM 4,478,484000 Debts equity ratio Total debts Common equity RM 6,100,936000 = 1.19 : 1 RM 5,129,221000 RM 2,991,508000 = 2.39 : 1 RM 4,478,484000 Times interest earned or Interest cover Profit before interest and before taxation x 100 Interest charges RM 748,698000 = 3.72 times RM 201,42100 RM 244,145000 = 4.85 times RM 50308000 Earnings per share Net income available to common stockholders x 100 Number of ordinary shares in issue RM 332,580000 = RM 0.25 RM 1,327,216000 shares RM 147,098000 = RM 0.19 RM 777,712000 shares Price earnings ratio Market price per ordinary share Earnings per share RM 4.80 per share = 19.2 times RM 0.25 per share RM 2.60 per share = 13.68 time RM 0.19 per share Earnings yield Gross earnings per share x 100 Market price per ordinary share 100/ 75 x RM 0.25 x 100 = 6.94 % RM 4.80 100/ 75 x RM 0.19 x 100 = 9.74 % RM 2.60 Market price per book value Market price per ordinary share Net book value per ordinary share RM 4.80 per share RM 5,129,221000 / 1,327,216000 shares = RM 3.86 = RM 4.80 RM 3.86 = 1.24 : 1 RM 2.60 per share RM 1,250,246000 / 777,712000 shares =RM 1.61 = RM 2.60 RM 1.61 = 1.61 : 1 Liquidity of company Current ratio and Acid-test ratio both are lower than IJM, indicating that company might have lesser amount of current assets and liquid assets in relation to its current liabilities so that company has low liquidity to finance its short-term debts and might be facing some short-term financial problem Assets management of company Inventory turnover is much lower than WCT, indicating company has a slow stock turn in its business so that goods purchased and kept in store were very slowly taken out for resale, resulting large amount of stock to tie up money, having poor inventory management. Total assets turnover is lower than WCT, indicating that company was using its assets in business activities, causing lower sales generated in relation to its assets value, having poor assets management. Debtor ratio and days sales outstanding are higher than IJM, indicating that company has allowed longer credit time to collect money slowly from customers, causing large amount of debtor balance to tie up money, having poor management o debtor collection Debts management Debts ratio and debts equity ratio are higher than IJM, indicating that company has heavy debts with large amount of debts in relation to its assets, bearing high interest cost in relation to its available profit. Times interest earned is lower than WCT. Company has a risk of being forced to dispose part assets for paying back the debts and interest cost if it lacks of fund for settlement. Market value to common stockholders Earnings per share and earning yield are lower than IJM, indicating that company has lower growth in business profit, resulting lower net income available to each unit share, being less attractive and lower value to common stockholders. This evidenced by the price earnings ratio and price cash flow ratio being higher than WCT. Market price book value ratio is higher than IJM, indicating that company share price has risen up above its real asset value or book value, being not realistic stockholders. CONCLUSION In my conclusion, I liked to choose WCT Company. WCT Company is good performance in the business because WCT Company has a stronger financial performance. WCT Company is the highest basic earning power and return on common equity. This company has increase the production volume and sales volume at lower costs. Thus, the WCT Company didnà ¢ÃƒÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¡Ãƒâ€šÃ‚ ¬ÃƒÆ' ¢Ãƒ ¢Ã¢â€š ¬Ã… ¾Ãƒâ€šÃ‚ ¢t face any short term liabilities and they are stable. Other than that, the base information is often out of date, so timeliness of information leads to problems of interpretation. Information is published accounts is generally summarized information and detailed information may be needed. Analysis of accounting information only identifies symptoms not causes and thus is of limited use. Selection of industry norms and the usefulness of norms based on averages. Different firms having different financial and business risk profiles and the impact on analysis. Different firms using diffe rent accounting policies. Impacts of the size of the business and its comparators on risk, structure and returns. Impacts of different environments on results, different countries or home based versus multinational firms. QUESTION 2 Financial market can be found in nearly every nation in the world. Financial market are typically defined by having transparently, pricing, basic regulations on trading, cost and fees. Some financial markets only allow participants that meet certain criteria. It can be based on factors like the amount of money, the investor, and knowledge of the markets or the profession of the participant. Most financial market have period of heavy trading and demand for securities. Transparency is important to increase the confidence of participants and therefore foster efficient financial market place. Financial market are deal with different types of financial instruments such as stocks or shares, bonds, notes, mortgages and other claims on real assets as well with the derivative securities or commodities whose valued are derived from changes in the prices of other assets. Transferring capital or fund from savers to borrowers in the financial market, there are three different ways. There are direct transfers from savers to borrowers. It is when a corporation issues and sells its stocks or bonds directly to savers without passing through any financial institution so the corporation as borrower directly delivers its securities to savers who in turn give money to the corporation. In direct transfer from savers to borrowers through investment banking house is when an investment bank underwrites the issuance of a corporation securities where the investment bank serves as a middlemen to facilitate the issuance of corporation by purchasing the securities and resell the same securities to serves so the money paid by the savers for purchase of corporation are passed by the investment bank and to be received by the corporation which acts as borrower. The corporation securities and the savers money merely pass through the investment banking house. Indirect transfer from savers to borrowers through a financial intermediary is when a financial intermediary such as a bank or a mutual fund obtains fund from savers by issuing its own securities or certificate of deposit to savers. Then, the financial intermediary uses the fund collect from savers to purchase and to hold the securities of other corporation as investment. The capital or fund is transferred from savers to financial intermediary when savers pay money and in exchange for receiving certificate of deposit or securities issued by the financial intermediary. Then in turn the financial intermediary will further transfer this fund to other corporation by paying money out of the fund to purchase securities of other. Most of the savers prefer to hold certificate of deposit because they are safer and more liquid than mortgages and loans. Investment banking house is an organization that underwrites and distributes the new issue of business corporation securities to assist corporation obtain fund for financing BIBILOGRAPY 1. Clark, Scott. Financial Ratios Hold the Key to Smart Business. Birmingham Business Journal. February 11, 2000. 2. clark Scott. You Can Read the Tea Leaves of Financial Ratios. Birmingham Business Journal. February 25, 2000. 3.https://www.answers.com/topic/financial-ratio#ixzz1FBkBKA1n 4. www.accountingcoach.com EBARY Elvin, Mike. Financial Risk Taking : An Introduction to the Psychology of Trading and Behavioural Finance. https://site.ebrary.com/lib/olympia/docDetail.action?docID=10113930p00=introduction+to+finance Ramagopal, C.. Financial Management. Daryaganj, Delhi, IND: New Age International, 2008. p iv. https://site.ebrary.com/lib/olympia/Doc?id=10318697ppg=5 Venardos, Angelo M.. Islamic Banking and Finance in South-East Asia : Its Development and Future. https://site.ebrary.com/lib/olympia/Doc?id=10126039ppg=2