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Effective Distributors ltd

   

Added on  2020-04-01

15 Pages3066 Words170 Views
Finance
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1AccountingName:Course Professor’s nameUniversity nameCity, StateDate of submission
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2Question 1Executive summaryThis is a report shall be highlighting the major problems that Effective Distributors ltd is encountering. A comprehensive financial analysis will be carried out , starting from the profitability ratios( i.e return on equity and return on assets) the gross profit margin for the company and the net profit margin that will show how the company’s profit varies and how the profits may be improved. The report will also cover how effective the company maintains its inventory through the calculation of inventory ratios. Other ratios that the reports analyses are the selling ratio, finance ratio, accounts receivable, current account, acid test ratio among others. Recommendations on the ratio analysis will be provided.IntroductionThis is a comprehensive survey of the trading activities conducted by effective distributors limited whose directors are concerned with the company’s operations and hence have asked for acomprehensive report for the company. From the income statement for the year 2016 we shall analyze all the important ratios for the company to evaluate and comment on which aspect of the company it needs to improve on(Hodge, 2008).Ratio analysisProfitabilirty ratiosThese are ratios that assesses the ability of the company to generate earnings compared to the relevant costs and expenses that it incurred during a specific period. Having a higher ratio relative to the same ratio from the past period indicates that the company is doing well.
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3Return on Equity(ROE)This is the amount of net income returned as a percentage of shareholders equity. It measures company’s profit generated from the shareholders equity. Return on equity is calculated as follow:Return on Equity=Net income/ shareholders equityRatioFormulae20152016Return on Equity(ROE)Return on Equity=Net income/ shareholders equity11000/144000*100%=0.076=7.6%3500/143500*100%=0.024=2.4%Return on Assets(ROA)This ratio measures the efficiency of the company’s assets to produce profits. Therefore, if the company is managing its assets effectively to produce profits during the period(Horngren, 2014).The ratio is calculated as follows.R.O.A=Net income/ Average total Assets
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4RatioFormulae20152016Return on AssetsR.O.A=Net income/ Average total Assets11000/282000*100%=3.9%3500/287000*100%=1.2%The two ratios return on Equity and Return on Assets have decreased from 2015 to 2016 as follows For R.OE 7.6%.in 2015 to 2.4% in 2016. For the return on Asset ratio, there is also a decreased from 3.9% to 1.2%.Net Margin Ratio
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