Advantages and Limitations of Ratio Analysis

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Finance Insights and Business
Intelligence

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Table of Contents
Introduction................................................................................................................................3
1..................................................................................................................................................3
2..................................................................................................................................................4
3..................................................................................................................................................5
Conclusion..................................................................................................................................5
References..................................................................................................................................6

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Introduction
In this report the financial analysis in respect of Unilever Plc. will be carried out. This will be
performed with the help of ratio analysis. There will be various ratios that will be calculated
and with the help of them, various areas will be analyzed. The efficiency, profitability,
liquidity and other areas will be taken into account for the purpose of evaluation of the
position and performance of the business.
1.
A ratio is an important approach in which calculation with the help of financial statements
will be made (Delen, Kuzey and Uyar, 2013). The ratios are required to be calculated for
analysis and the same will be performed in the given case. All of the ratios which are required
will be ascertained are represented below.
Liquidity ratios:
Particulars Formula 2017 2018
Current
ratios
Current assets/current liabilities 0.73 0.78
Quick ratio Quick assets/current liabilities 0.56 0.57
Leverage ratios:
Particulars Formula 2017 2018
Debt to asset ratio Total debt/total assets 0.76 0.79
Debt to equity
ratio
Total debt/total equity 3.19 3.84
Profitability ratios:
Particulars Formula 2017 2018
Operating profit margin Operating profit/sales*100 16.49% 24.59%
Net profit margin Net profit/sales*100 12.07% 19.24%
Efficiency ratios:
Particulars Formula 2017 2018
Asset turnover ratios Net sales/total assets 0.89 0.86
Account receivable turnover
ratios
Net sales/total Account receivable 10.29 7.86

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2.
In the business, there are various stakeholders who are involved and they have some interest
in the company. Due to this, they are required to have knowledge about the financial
performance and position which is maintained by company (Babalola and Abiola, 2013). In
this, there will be consideration of the results which have been obtained with the help of
above-made calculations. In analysis, there is coverage of all the areas which are required for
the ascertainment of stakeholder’s benefits.
Investors are an important part of business as they are the ones who make the investment in
the company and are an important source of funds for business. The investment is made by
them with an intention to earn the required returns on the same and for that, there is the need
to have the appropriate performance maintained in the company. The main focus of them is
on the profitability and in the given case the ratios for the same have been calculated. There is
a high increase in the profits which is from 12.07% in 2017 to 19.24% in 2018 (Unilever,
2018). This is beneficial for the company as well as the investors. This is because with the
higher amounts of profits there will be an appropriate distribution that will be made to the
shareholders and their return will be rising. The main aim for which investment is made will
be fulfilled with the help of this. Due to this, it can be said that performance is satisfactory
from their point of view.
Employees are the ones who are involved in all the operations of the company and require
various facilities for the same. They need job security and for that, the solvency of the
business is to be analyzed. There is a very less increase in the current and quick ratio but still,
they are maintained at a very low level. The standards which are set in this respect are not
attained and the current ratio is a very low level (Ally, 2013). There is an increase in ratio and
reached 0.78 which is not good. At this level, the company will not be able to meet the
obligations and if the situation continues then a threat to liquidity will be made which is
harmful to employees also as job security will not be there. The turnover ratios are declining
and that shows inefficiency in the maintenance of the activities in the business. Due to this
the position and performance are not satisfactory with the perspective of employees.

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3.
The financial ratios are used in business for the proper analysis and in that there are various
merits and demerits which shall be taken into account. The discussion in this respect is
provided below.
Advantages:
 The calculation of ratios is an important aspect as with the help of this the financial
statements which are prepared are analyzed.
 The calculation is made with the help of the information and comparison among the
performance of various years is made. This helps in evaluating the performance and
changes which take place (Xplaind, 2020).
 The trend which is involved in the company is identified with the help of ratios.
Disadvantages:
 There are various demerits which are also involved in relation to the ratios. Although it is
a very helpful approach but the process which is involved considers financial statements
that are complicated.
 Various companies make the statements in a different manner and due to that, it is
difficult to make the calculation and comparison among them (Faello, 2015).
 In this, there is the consideration of historical data and no consideration for the coming
period is made.
 There are various assumptions that are made in this process and due to that, the results
may fluctuate in various conditions which make the result unreliable.
Due to all of the above discussed points it can be said that the use of ratios will be involved
with both the merits as well as certain demerits.
Conclusion
The report concludes about the performance of Unilever and in that there is the consideration
of the financial statements. They have been used and with that ratios have been ascertained.
The evaluation of the performance is made and in that perspective of employees and investors
is taken into consideration. The advantages and disadvantages in relation to the ratio analysis

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are considered and they all have been mentioned. By that proper understanding has been
developed for this approach.

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References
Ally, Z. (2013) Comparative analysis of financial performance of commercial banks in
Tanzania. Research Journal of Finance and Accounting, 4(19), pp.133-143.
Babalola, Y.A. and Abiola, F.R. (2013) Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), pp.132-137.
Delen, D., Kuzey, C. and Uyar, A. (2013) Measuring firm performance using financial ratios:
A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Faello, J. (2015) Understanding the limitations of financial ratios. Academy of Accounting
and Financial Studies Journal, 19(3), p.75.
Unilever. (2018) Annual report. [Online] Available at:
https://www.unilever.com/Images/unilever-annual-report-and-accounts-2018_tcm244-
534881_en.pdf [Accessed 22 January 2020]
Xplaind. (2020) Advantages and Limitations of Ratio Analysis. [Online] Available at:
https://xplaind.com/425487/advantages-limitations [Accessed 22 January 2020]