Table of Contents
Ratio Analysis 2
A) Definition and explanation of different financial term: 2
B) Calculation of financial ratios: 3
C) Ratio analysis: 3
References 5
Ratio Analysis
A) Definition and explanation of different financial term:
i. Current Assets are the items on balance sheet of an entity which are in the form of either cash, equal to cash or can be converted to cash within next one year. For example: investments, foreign currency, cash, inventory, receivables and work in process(Kumar, 2014). ii. Noncurrent Assets are the long term investments of an entity which full value cannot be realised within one year of balance sheet date. Examples are: plant, equipments, furniture, vehicles, land, building, brand recognition, taxes, …show more content…
Accruals are adjustments of revenues that have been earned by an entity but not recorded yet in its accounts and expenses that have been acquired but not recorded yet in its accounts. In regard of accruals in revenue the example is electricity utility company, as it uses resources and employees in one month for generating electricity for customers to use in same month but it does not charge the customer for it in same month until the meters are read in next month. So for having appropriate entry on utility company’s statement, there is adjustment needed to increase revenue. In regard of accruals in expenses the example is one’s working bonus which has been earned in this year but will not be paid till next year. This year’s financial statement needs to reflect this bonus amount so there is adjustment needed (Kumar, …show more content…
The ratios calculated above reflect the performance of Kanat Limited.
ROCE: There is minor increase of ROCE from year 2016 to 2017. Therefore, despite of small increase, it is good indicator that return is increasing.
Operating Profit %: There is decline in operating profit which indicates that operating expense has increased from year 2016 to 2017 which require control. Gross Profit %: Gross profit is also decreasing from 30% to 36%. This fall is indicator of increasing cost of sales.
Fixed Asset Turnover: This ratio is satisfying as sales are generating from fixed asset efficiently.
Current Asset Turnover: It has risen from 2.19218122 to 1.66666667 from year 2016 to 2017. The ratio is rising which is indicator that current assets are efficiently use to generate sales.
Current Ratio: Current ratio is falling which is not good indicator as current liabilities are increasing.
Acid-Test Ratio: It is also an indication of liquidity. Its falling is indicates high difference between current ratio and acid-test ratio indicates a high value inventory in stock.
Gearing Ratio: Gearing ratio is decreasing from 66.66% to 40% which indicates that Kanat Limited’s long-term debt is decreasing. Decrease in gearing will make difference for Kanat Limited borrow
Ratio Analysis 2
A) Definition and explanation of different financial term: 2
B) Calculation of financial ratios: 3
C) Ratio analysis: 3
References 5
Ratio Analysis
A) Definition and explanation of different financial term:
i. Current Assets are the items on balance sheet of an entity which are in the form of either cash, equal to cash or can be converted to cash within next one year. For example: investments, foreign currency, cash, inventory, receivables and work in process(Kumar, 2014). ii. Noncurrent Assets are the long term investments of an entity which full value cannot be realised within one year of balance sheet date. Examples are: plant, equipments, furniture, vehicles, land, building, brand recognition, taxes, …show more content…
Accruals are adjustments of revenues that have been earned by an entity but not recorded yet in its accounts and expenses that have been acquired but not recorded yet in its accounts. In regard of accruals in revenue the example is electricity utility company, as it uses resources and employees in one month for generating electricity for customers to use in same month but it does not charge the customer for it in same month until the meters are read in next month. So for having appropriate entry on utility company’s statement, there is adjustment needed to increase revenue. In regard of accruals in expenses the example is one’s working bonus which has been earned in this year but will not be paid till next year. This year’s financial statement needs to reflect this bonus amount so there is adjustment needed (Kumar, …show more content…
The ratios calculated above reflect the performance of Kanat Limited.
ROCE: There is minor increase of ROCE from year 2016 to 2017. Therefore, despite of small increase, it is good indicator that return is increasing.
Operating Profit %: There is decline in operating profit which indicates that operating expense has increased from year 2016 to 2017 which require control. Gross Profit %: Gross profit is also decreasing from 30% to 36%. This fall is indicator of increasing cost of sales.
Fixed Asset Turnover: This ratio is satisfying as sales are generating from fixed asset efficiently.
Current Asset Turnover: It has risen from 2.19218122 to 1.66666667 from year 2016 to 2017. The ratio is rising which is indicator that current assets are efficiently use to generate sales.
Current Ratio: Current ratio is falling which is not good indicator as current liabilities are increasing.
Acid-Test Ratio: It is also an indication of liquidity. Its falling is indicates high difference between current ratio and acid-test ratio indicates a high value inventory in stock.
Gearing Ratio: Gearing ratio is decreasing from 66.66% to 40% which indicates that Kanat Limited’s long-term debt is decreasing. Decrease in gearing will make difference for Kanat Limited borrow