Analysis of a Listed Company: Role of Ratio Analysis in Financial Performance

Accounting and finance
analysis of a listed
company

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
MAIN BODY...................................................................................................................................3
SUMMARY AND CONCLUSION..............................................................................................18
REFERENCES..............................................................................................................................20

EXECUTIVE SUMMARY
The project report summarise about role of ratio analysis in order to make better analysis
of financial performance. Under the report, vital range of ratios are calculated and interpreted in
order to assess performance of chosen business entity listed in London stock exchange. As well
as further part of report abstracts about key findings and recommendations for company in order
to enhance the performance.
MAIN BODY
Ratio analysis- In this competitive environment, there are number of techniques that are used by
business entities in order to analyse monetary performance in an effective manner. The ratio
analysis technique is one of them. It can be defined as a kinds of approach in that wide number
of ratios are calculated and analysed in order to take crucial decision in a better way (Uchide and
Imanishi, 2016). By help of proper ratio analysis, it becomes easier for companies to get aware
about which aspects are needed to be improve and which aspects are strong. Under this
technique, the key ratios are profitability ratio, liquidity ratio and many more. Basically, in order
to analyse the financial performance of companies two years consecutive years ratios are
calculated and compared in a detailed manner. Herein, below the importance of ratio analysis
technique is demonstrated in such manner that is as follows:
 This type of analysis is beneficial in order to make proper financial analysis.
 In addition, the ratio analysis play a significant role in order to judge monetary soundness
of a business entity.
 Another key benefit of ratio analysis is that it is useful for companies for making analysis
of operational efficiency of enterprises.
 The ratio analysis makes enable to identifying the risk of business firms.
So these are some key benefits of ratio analysis technique for companies. In the aspect of this
project report a company has been chosen that is listed in London stock exchange. The name of
company is British American Tobacco which operates in manufacturing of tobacco products.
Overview of company- The British American Tobacco is a British multinational cigarette and
tobacco manufacturing company. Its headquarter is in London, United Kingdom. As per the

financial report of year 2012, this company was world's second largest cigarette manufacturer.
The company operates in more then 180 nations all around the world. The company was founded
by Imperial brands and James Buchanan Duke (About British American Tobacco plc, 2019). As
per the financial information of year 2018, there were more then 55000 employees in different
branches of this company. Apart from it, some key information about this company are
mentioned below in such manner:
Stock price – 3009.50 GBX (+28.50, +0.96%) as on 25th of November, 2019.
Revenues- £2449.2 crores GBP as per financial year 2018.
Chief executive officer- Jack Bowles.
Types of ratios:
1. Liquidity ratio- This can be defined as a kinds of ratio in that defines about businesses'
efficiency in order to meet obligations when they become due (Lakshmi, Martin and Venkatesan,
2015). In broad manner, this is a type of ratio which assess business entities capability in order to
define whether they are able to make payment of short term debts or not. In the aspect of above
chosen company, British American Tobacco their accountant computes this ratio with an aim of
determining efficiency of paying short term debts. There are mainly two types of liquidity ratios
that are mentioned below in such manner:
 Current ratio- It is a type of ratio which indicates the relation of a business entity current
assets to its current liabilities. This ratio is one of they key ratio for analysing liquidity
position of companies. Under it, this is considered that a higher current ratio is better for
companies as compare to a smaller one. The ideal ratio is 2 : 1 that states that companies
should have double amount of current assets for making payment of short term debts or
current liabilities. There is a particular formula which is used to compute current ratio
that is as follows: Current ratio = Current assets / current liabilities. In the context of
British American Tobacco company, the current ratio is calculated and analysed in such
manner:
2017 2018
Current assets £13966 £12655
Current liabilities £15544 £16329

Calculation 13966/15544 12655/16329
Current ratio 0.90 times 0.77 times
Ratio
0.7
0.75
0.8
0.85
0.9
0.95
0.9
0.77
2017
2018
Analysis- On the basis of above calculated current ratio of British American Tobacco company,
this can be find out that in year 2017, the current ratio was of 0.90 times and 2018, it was of 0.77
times (About British American Tobacco plc financial statements, 2019). This is indicating that
company's liquidity position is decreasing in year 2018 as compare to year 2017. As well as
company is not able to meet the criteria of ideal ratio of 2:1 times. Thus, it can be analysed that
above company is not able to make payment of short term debts as they do not have enough
amount of current assets.
 Quick ratio- In the terms of accounting, this ratio is also known as Acid test ratio. It can
be defined as a type of ratio which is used to measure businesses' liquidity (DeBord, et.al
2017). Basically, it compares the total value of cash, accounts receivables, marketable
securities from the value of current liabilities. Similar as the above ratio, if amount of
calculated ratio is higher then it is considered as better condition for companies. The
ideal value of quick ratio is 1.5 : 1 times that means a company should have 1.5 times of

assets in order to make payment of 1 time of current liabilities. This ratio is calculated by
a particular formula which as: Quick ratio = Quick assets – Current liabilities. In the
aspect of above company, this ratio is calculated and analysed for financial year 2017-18
that is as follows:
2017 2018
Quick assets £8102 £6626
Current liabilities £15544 £16329
Calculation 8102/15544 6626/16329
Quick ratio 0.52 times 0.40 times
Working Note:
Quick assets= Current assets- (Stock+prepaid expenses)
For year 2017:
= 13966-(5864+0)
= £8102
For year 2018:
= 12655- (6029+0)
= £6626