Financial Performance Analysis of Redding Co. and Neaves Co.

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Financial Management

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Contents
Introduction......................................................................................................................................3
Part 1: Calculation and analysis of ratios of two given companies.................................................3
Part 1.i and Part 1.ii: Calculation of ratios and Comparison of Financial Performance of
Companies....................................................................................................................................3
Part 1.iii: Use of Financial Ratios as a tool for Interpreting and Assessing Business
Performance.................................................................................................................................9
Part 2: Definition of the term ‘Agency’ and its used in Achieving the Objectives of Redding Co.
and Neaves Co.................................................................................................................................9
Part 3: Impact of raising funds for the refurbishment of equipments through using additional
loans or equity on Redding Company...........................................................................................11
Conclusion.....................................................................................................................................13
References......................................................................................................................................14
Appendix........................................................................................................................................16

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Introduction
The present report is developed for analyzing the financial performance of tow specialist
manufacture companies, that are, Redding Co. and Neaves Co. It has been carried out with the
use of the financial ratio analysis. It is followed by discussing the impact of the concept of
agency on meeting the growth objectives of the company. Lastly, it has also discussed the impact
on the company Redding of incorporating the use of additional loans to gain funds.
Part 1: Calculation and analysis of ratios of two given companies
Part 1.i and Part 1.ii: Calculation of ratios and Comparison of Financial Performance of
Companies
This section has provided detailed calculation of ratios of Reddings Company and Neaves
Company. Two ratios of each category of ratios analysis have been calculated and discussed
below.
Ratio analysis is the quantitative business methods used to evaluate the company
performance in relation to its liquidity, profitability, efficiency and solvency. Ratio analysis uses
information provided in the financial statements of the company and compare it to generate the
results that describe the company performance. The main objective of ratio analysis is to
interpret the financial statements and other financial data provided in the annual report. The
purpose is to provide the essential information to the stakeholders of the company so that they
can make appropriate decisions (Brigham and Michael, 2013).
Ratio analysis has been categorized in five board groups and they are given below:
 Profitability Ratios
 Efficiency Ratios
 Liquidity Ratios
 Gearing Ratios
 Investors Ratios
Profitability Ratios
Profitability ratios refers to the class of financial measures that is used to assess
company’s ability to generate earnings in relation to various metrics such as revenue,
shareholder’s equity, assets and capital employed. Some of the common profitability ratios used
to assess the profitability performance of a company is gross profit margin, operating profit
margin, net profit margin, return on equity, and return on capital employed (Damodaran, 2011).

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Net profit Ratio Return on Assets
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
25.13%
15.31%
36.10%
31.22%
Profitability Ratios
Reddings Co. Neaves Co.
Axis Title
Note: See Appendix for ratio calculation
Net profit Margin: The ratio is used for measuring the profitability of a company by analyzing
the net income or profit realized as a percentage of revenue. The formula used for its calculation
is as follows:
Net Profit Margin=Net Income/Sales Revenue (Davies and Crawford, 2011)
It can be said from comparing the net profitability ratio of Redding Co and Neaves Co
during the financial year 2017 that Redding Company is having a lower net profitability as
compared with Neaves Co. This is largely due to less sales revenue of the company Redding as
compared with Neaves.
Return on Assets (ROA): It is used for measuring the profitability of a company through
assessing the amount of profit generated from the asset base. The formula used for calculation is
as follows:
ROA=Net Income/Average total assets
The ROA of Neaves Company is better than that of Redding as depicted from the above
graph. Thu, it can be said that Neaves is able to use its asset base in an effective manner to
generate profit as compared to Reddings Co (Krantz, 2016).