Comparison of Accounting Ratios of R plc with S plc in Distribution of DVD Recordings

This report compares the accounting ratios of R plc with S plc in distribution of DVD recordings. It includes profitability ratios, liquidity ratios, capital structure management, and stock market performance. The report also discusses the limitations of accounting ratios.

Business Finance

Table of Contents
INTRODUCTION ..........................................................................................................................3
TASK...............................................................................................................................................3
Calculation of required accounting ratios and comparison with S plc........................................3
CONCLUSION ...............................................................................................................................5
REFERENCES................................................................................................................................7

INTRODUCTION
Different tools and techniques are used by institutions to get an insight about how the business is
performing. These tools and techniques helps the business leaders and other stakeholders of a
business in taking various decisions which may be for or against the business. Accounting tools
are one of these and it includes financial ratios analysis, trend analysis, cash flows and changes
in same, horizontal and vertical analysis etc (Aras, and Yildirim, 2018). The following report
highlights a detailed comparison between two firms working in distribution of DVD recordings.
The accounting ratios of S plc have been provided and this report calculates ratios of R plc for
better comparison. The report further discusses the limitations that have been present in the
interpretation.
TASK
Calculation of required accounting ratios and comparison with S plc.
Accounting Ratios refers to the relationship between two or more numerical values taken
from the financial statements of a company. These accounting ratios aids the strategic managers
in implementing new and better policies which would make a business more successful
(Alakaleek and Cooper, 2018). These also helps different stakeholders in comparing the
performance of the business with itself or with other businesses working in same industry.
Following are the ratios of R plc.
Profitability Ratios: These ratios calculates how the business is earning in response to its revenue
from sales.
 Gross profit margin : Gross profit / Net Sales * 100
= 10880 / 26245 * 100
=41.45 %
 Operating profit margin : Operating profit / Net Sales * 100
= 5313 / 26245 * 100
= 20.24 %
 ROCE: Earning before interest and tax / Capital employed
= 5313 / 26245 * 100
= 20.24 %

Liquidity ratios: these gives insights about how much the business is capable to meet its short
term payment obligations.
 Current Ratio : Current Assets / Current Liabilities
= 15089 / 9466
= 1.59
 Quick ratio : Current Assets - Inventory / Current Liabilities
= 15089 - 6983 / 9466
= 0.86
Capital Structure Management: these shows what capital structure the business is following.
 Debt-Equity ratio : Debt / Equity
= 2800 + 9466 / 14540 * 100
= 84 %
 Interest Cover : Earnings before interest, tax and depreciation / Interest Expense
= 5313 / 980
= 5.42
Stock Market performance:
 Dividend Cover : Net income / Dividend Declared
= 3033 / 1380
= 2.19
 Earnings per share: Net income - Preferred stock dividend / average outstanding shares
= 3033 / (5000 / 0.25)
= 3033 / 20000
= 0.15
 Price Earning Ratio : Share price / Earning per share
= 0.25 / 0.15
= 1.67
Interpretation:
It has been observed in the above ratio calculations that R plc. is performing good. The
business in the last accounting period has earned the gross profit of 41.45 % on its sale revenue
and an operating profit of 20.24%. While comparing these with S plc, R plc has greater rate or
earning profits on its sale. R plc is has less liquidity position than S plc which can pose a threat

for a short term. S plc has approximately 5 % more capital employed than R plc. While analysing
its current ratio, it has the ability to pay 1.5 times the liabilities with its current assets which is
considered standard but the quick ratio is really low than the required ratio which is 1 : 1. The
firm is not liquidating enough. The debt equity of the business is good as they have 84 % more
debts as compared to equity. They can take more risk to increase their profits. The company is
capable to pay back its interest obligations by 5 times which can be said that the business is
efficient. S plc is not that efficient as the rate is 3 only. Both the business have similar level of
dividend coverage ratio and the profit earning is also good. The earning per share of the business
is not that great compared to R plc. The rate is just 15p per share. S plc earns 8 times which is far
better than R plc who has price earning ratio at 1.
Following are the limitations that the accounting ratios hold as these metrics are not always
perfect:
 The base of accounting ratios is the financial figures that are there in the financial
statements of the business, these figures can be manipulated and can be approximated
which makes the accounting ratios less accurate.
 The economic conditions, fluctuations in the prices of goods and shares have been
ignored but these are useful tools in analysing the performance of the business (Weber,
and ElAlfy, 2019).
 The qualitative aspect of the business have been ignored which should also be taken into
account while commenting on performance of the business.
 The comparison done in the above part may not be accurate as there are different ways
of calculating the business ratios and the formulae used while calculating the ratios of S
plc may differ from R plc.
 The change in the stock price and inflation rate has been ignored while ratio analysis but
these determine a company's performance as well (Costello, 2019).
CONCLUSION
From the above mentioned report it can be concluded that both the businesses, R plc and
S plc have been working similarly with a little difference in the ratios of efficiency and
profitability. It can also be concluded that the accounting ratios are a crucial element in the
analysis of the performance of a business. With this tool, the strategic leaders can have a

competitive edge as they can formulate strategies accordingly. These ratios are not always
accurate as they also hold some limitation which have been mentioned in the report.

REFERENCES
Books and Journals
Alakaleek, W. and Cooper, S.Y., 2018. The female entrepreneur’s financial networks: accessing
finance for the emergence of technology-based firms in Jordan. Venture Capital. 20(2).
pp.137-157.
Aras, G. and Yildirim, F.M., 2018. The impact of corporate finance decisions on market value in
emerging markets. International Journal of Productivity and Performance
Management.
Costello, A.M., 2019. The value of collateral in trade finance. Journal of Financial
Economics. 134(1). pp.70-90.
Weber, O. and ElAlfy, A., 2019. The development of green finance by sector. In The Rise of
Green Finance in Europe (pp. 53-78). Palgrave Macmillan, Cham.