Accounting for Managers: Analysis of Financial Performance and Ratios

This article provides an analysis of the financial performance and ratios of Aristocrat Leisure Ltd from 2013 to 2017. It includes horizontal analysis of the income statement, ratio calculations, and comments on financial performance through analyzing ratios.

Running head: ACCOUNTING FOR MANAGERS
Accounting for managers
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Table of Contents
Horizontal analysis – Income statement....................................................................................2
Comment on the changes...........................................................................................................2
Ratio calculation.........................................................................................................................3
Comment on financial performance through analysing ratios...................................................3
References..................................................................................................................................7

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Horizontal analysis – Income statement
Comment on the changes
It can be recognized from the horizontal analysis of Aristocrat Leisure Ltd over the
years from 2013 to 2017 that the revenue of the company was in increasing trend. If the year
2013 is considered base year it can be stated that the revenue increased to 303.43% in the
year 2017. Keeping pace with the revenue the cost of sales also increased over the last 5
years. However, the rate of increase in cost of revenue was lower as compared to the increase
rate of revenue as the cost of sales has increased to 259.3% by the end of the year 2017.
Therefore the gross profit of the company was also in increasing trend and it increased to
341.42% over the last 5 years period (Aristocrat Leisure Limited – IR Site 2018). However,
the other income of the company was in decreasing trend and was reduced to 80% in 2017 if
compared with the year 2017. Various other operating expenses like development and design
cost, marketing and sales cost, general and administration cost of the company were in
increasing trend. Further, the finance cost of the company significantly increased to 531.95%
in 2015 and further increased to 592.90% in 2016 from 82.84% in 2014. However, the
company was able to control the fiancé cost in the year 2017 and it reduced to 371.01% from
592.90% in 2016. It can be further identified that the income tax expenses of the company
significantly increased to 869.40% in 2017. However, the increase rate of income tax

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expenses is more as compared to profit before income tax. Finally regarding net profit of the
company it is recognized that as the company was not able to generate any profit for the year
2014 the trend for that year was negative (Aristocrat Leisure Limited – IR Site 2018).
However, from next year the company was able to improve its position and the net profit
increased to 461.85% in the year 2017.
Ratio calculation
Comment on financial performance through analysing ratios
Profitability ratio – this is used by the investors and analysts for measuring and evaluating
the company’s ability to create income from its revenues. For analysing the profitability
status of Aristocrat Leisure over the years from 2013 to 2017 various profitability ratios like
gross profit margin, operating profit margin, return on ordinary equity and return on total
asset have been taken into consideration. Gross profit margin is the profit percentage
generated from revenue after paying the cost of sales (Babalola and Abiola 2013). Gross
profit margin of the company was in increasing trend and has increased to 60.57% in 2017

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from 53.83% in 2013. Operating profit margin is the percentage of profit generated from
revenue after paying the expenses for operation. Operating profit margin of the company was
in increasing trend and has increased to 17.85% in 2017 from 32.23% in 2013. Return on
asset measure how well the entity is in generating earning from total assets. Return on total
asset of the company was in increasing trend and has increased to 15.04% in 2017 from
12.28% in 2013. Return on equity measures the dollar generated by the company from each
dollar of the shareholders equity. Return on shareholder’s equity of the company was in
increasing trend and has increased to 36.79% in 2017 from 28.56% in 2013. However, as the
company could not generate positive net profit during 2014 both return on total asset as well
as return on equity of the company was in negative (Heikal, Khaddafi and Ummah 2014).
Hence, the overall profitability position of the company was in improving trend.
Efficiency ratio – most of the companies used the efficiency ratio for analysing routine
affairs like managing assets and liabilities. For analysing the efficiency of Aristocrat Leisure
over the years from 2013 to 2017 various efficiency ratios like inventories turnover period
and debtor’s settlement period have been taken into consideration (Noreen, Brewer and
Garrison 2014). From the inventories turnover period it can be identified that the company
has improved its collectability period as it has been reduced from 64.54 days to 44.78 days
over the period of the year 2013 to 2017. On the other hand, the debtor’s settlement period
has been significantly improved from 134.66 days to 69.34 days. Therefore, in terms of both
collection from debtors and replacement of inventories the company has improved its
efficiency (Vogel 2014).
Liquidity ratio – this is the financial metric analysed for determining the ability of the
company to pay off its short-term obligations without raising any external capital. For
analysing the liquidity status of Aristocrat Leisure over the years from 2013 to 2017 various
liquidity ratios like current ratio and quick ratio have been taken into consideration (Mathuva

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2015). Under current ratio the short term assets of the company is compared with short term
liabilities whereas under quick ratio the most liquid assets like inventories are excluded from
current assets. Both the ratios of the company till the year 2016 were in reducing trend.
However, in 2017 the company was able to improve its liquidity position as compared to the
year 2016.
Financial gearing ratio – gearing ratio focuses on company’s capital structure that is the
proportion of debt as compared to equity. For analysing the gearing status of Aristocrat
Leisure over the years from 2013 to 2017 various gearing ratios like debt to asset ratio,
interest coverage ratio and asset turnover ratio have been taken into consideration. Debt to
asset ratio that determines the proportion of debt raised for financing the asset of the
company has increased from 0.57 in 2013 to 0.71 in 2015 (Wahlen, Baginski and Bradshaw
2014). However, the company was able to improve its leverage position as the debt
proportion is reduced from 0.71 to 0.59 over the years from 2015 to 2017. Interest coverage
ratio of the company has been improved as the ratio has been improved from 8.60 times to
12.61 times over the years from 2013 to 2017. Further, the asset turnover of the company
determines the efficiency of the company in deploying its asset to create revenue (Caccioli et
al. 2014). It is found that the asset turnover of the company was in reducing trend and
reduced to 0.78 in 2017 from 1.02 in 2013.
Investment ratio – investment ratios are used for assessing the company’s performance with
regard to its share price. For analysing the gearing status of Aristocrat Leisure over the years
from 2013 to 2017 various gearing ratios like debt to asset ratio, interest coverage ratio and
asset turnover ratio have been taken into consideration. EPS is the percentage of the profit
distributed to the shareholders on each shareholding (Delen, Kuzey and Uyar 2013). It can be
identified that as the net profit of the company was in increasing trend, the EPS of company
for the period over 2013 to 2017 was also in increasing trend. EPS has been significantly

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increased from 19.50 cents to 77.70 cents. Price earnings ratio is the ratio of the company’s
current market price of share to the EPS. It has been identified that the PE ratio of the
company till 2015 was in increasing trend and it increased to 34.72 in 2015 from 23.69 in
2013. However, after that it starts falling and reached to 27.32 in 2017 (Tayeh, Al-Jarrah and
Tarhini 2015). Dividend yield is the financial ratio used to measure the dividend payout ratio
of the company as compared to the market price of the share. It is represented in percentage
form and is computed through dividing the dividend paid per share by market price per share.
Dividend yield of the company was in reducing trend and it reduced to 1.60% in 2017 from
3.25% in 2013.

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References
Aristocrat Leisure Limited – IR Site., 2018. Investor Relations Homepage | Aristocrat Leisure
Limited – IR Site. [online] Available at: https://aristocratleisurelimited.gcs-web.com/
[Accessed 10 Aug. 2018].
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.
Caccioli, F., Shrestha, M., Moore, C. and Farmer, J.D., 2014. Stability analysis of financial
contagion due to overlapping portfolios. Journal of Banking & Finance, 46, pp.233-245.
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.
Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets
(ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and
current ratio (CR), against corporate profit growth in automotive in Indonesia Stock
Exchange. International Journal of Academic Research in Business and Social
Sciences, 4(12), p.101.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2014. Managerial accounting for managers.
New York: McGraw-Hill/Irwin.
Tayeh, M., Al-Jarrah, I.M. and Tarhini, A., 2015. Accounting vs. market-based measures of
firm performance related to information technology investments. International Review of
Social Sciences and Humanities, 9(1), pp.129-145.

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Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.
Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement
analysis and valuation. Nelson Education.