Financial Ratios and Analysis for ABC Ltd

ACCOUNTING

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
QUESTION 2...................................................................................................................................3
QUESTION 3...................................................................................................................................6
REFERENCES................................................................................................................................9

QUESTION 1
a) Calculations of Financial Ratios of Abc Ltd
Liquidity
2019 2018 Change
Current
Ratio Current Assets
£11,674.0
0
£10,990.0
0
Current
Liabilities
£11,572.0
0
£10,378.0
0 1.01 1.06 -4.74%
Quick Ratio
CA -
Inventories £9,055.00 £9,142.00
Current
Liabilities
£11,572.0
0
£10,378.0
0 0.78 0.88 -11.17%
Solvency
2019 2018 Change
Debt Ratio Total Liability
£25,187.0
0
£21,323.0
0
Total Assets
£31,634.0
0
£27,266.0
0 79.62% 78.20% 1.81%
Leverage
Ratio Total Assets
£31,634.0
0
£27,266.0
0 4.91 4.59 6.95%
Total Equity £6,447.00 £5,943.00
Gearing
Interest bearing
debt £5,800.00 £4,160.00
IBD + Equity
£12,247.0
0
£10,103.0
0 47.36% 41.18% 15.02%
B. Comments over liquidity and financial stability of company.
The liquidity and financial stability of company is very important to be identified before
investing in any company. The financial ratio is a method used by investors to identify the
position and financial health of company.
Liquidity ration are calculated for identifying the financial liquidity strength of company.
If the company has no financial liquidity than it may have to suffer losses (Singh and Singh,
2018). The liquidity is measured by current and acid ratio of company. The current ratio of
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company is 1.01 in 2019 and 1.6 in 2018. There has been a decline of 4.06% in the current ration
of company from last year. The current ratio has gone down due to sale of marketable securities
and current maturity of long term debt. This shows the ability of company to repay its short term
obligations with the available resources. The industry trend of current ratio is 1.7 where of
company is 1.01. The difference is not very wide therefore it could not be said that position of
company is weak. It was having current ratio near to standard last year.
Quick ratio of company is 0.78 and it has shown a decline of 11.17%. This ratio
represent liquidity position excluding the inventory. The inventory is higher than last year
therefore the decline is also higher than current ratio. Industry standard is 1 where of company is
below average. The liquidity position of company has to be strengthened using appropriates
strategies. It should write off unnecessary provisions for improving the liquidity position of
company. Major decline in the liquidity position is seen because of the long term debts that are
having current maturity (Pai and Dam ,2017). The stakeholders are influenced by the liquidity
position of company therefore it is important to have strong liquidity position.
Solvency ratios are used by investors and users of financial statements for identifying
ability of company to meet the debt obligations. Solvency ratio is used for identifying whether
the company is having sufficient cash flows for meeting the short and the long term liabilities.
For identifying the solvency of company debt and financial leverage is used by the investors.
The debt ratio of company against total assets identifies the assets that are financed by creditors.
It shows the ratio of company is 79.62% where the industry average is 60%. The ratio is higher
than the industry average. This shows that company have raised comparatively higher loans than
its competitors. Company has 20% higher debts which means company uses more of the debts
funds to carry out its business operations. Company has raised more loans this year against its
assets. Also the company is having outstanding payroll for the year.
Leverage ratio of company is used for identifying the debts of company against its debts.
Leverage ratio is also higher at 4.91 than the industry average of 2.5. As against equity also
company has higher debts. Company can raise funds through equity sources for improving the
leverage structure of company (Hałaj and Henry, 2017). Total long term liabilities have raised of
company from last year. Higher debts will increase the costs of company reducing the profits.
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