Financial ratio analysis is a useful comparison tool and it was developed to perform quantitative analysis on number found on financial statements. This comparison shows the trend or movement. However, JB plc can use the common insurance ratios to establish which brokers it should be conducting business with. From this financial statement, BU plc looks to be in good shape. By using the ratios, we can determine whether it fits within certain industry norms. The following is an analysis of these standard insurance ratios and the impact/conclusions the figures may appear.
Profitability ratios are arguably the most widely used ratios in investment analysis. These ratios include the ubiquitous “margin” ratios, such …show more content…
This looks to be a critical flaw in the business and would require further investigation.
Liquidity ratios are some of the most widely used ratios, perhaps next to profitability ratios. They are especially important to creditors. These ratios measure a firm’s ability to meet its short-term obligations. However, there are two measurements for this – the current and quick ratios. They are useful measures of how well the company can meet its financial demands. As there is extremely limited amount of inventory, the current ratio would be appropriate for this scenario.
Current ratio = current assets/current liabilities, where current assets are trade receivables plus cash and cash equivalents plus other items and current liabilities are insurance broking creditors plus other items = (299,670+163,340+43,330)/(385,000+97,670) = 506,340/482,670 =1.05
This looks to be good as there are enough assets to cover the liabilities but it should be monitored. This is not always the case. Liquidity does not necessarily have to mean cash, if the company can borrow quickly they can also rely on this. …show more content…
Ratios provide useful figures that are comparable across industries and sectors. Using financial ratios, investors can develop a feel for a company’s attractiveness based on its competitive position, financial strength and profitability. However, from the ratio analysis to show that BU plc is not taking on enough business risk because of the gearing ratio is so low. It would be worth to find out the reason why and to look into if there is potential to increase capital investment and expand. This would need to be investigated further but usually we would be happy for it to borrow for the long term good of the business. In summary, BU plc looks to have a good liquidity position but the productivity ratio is worrying and would warrant further investigation. Therefore, it would appear that this broker seems to have a very low gearing with a high