Analysis of Operations with Accounting Ratio

This document provides an analysis of the operations of a company using accounting ratios such as profitability ratio, liquidity ratio, and activity ratio. It also discusses the impact of bonus issue on earnings per share.

Advanced financial reporting

Table of Contents
Analysis of operations of company with the help of accounting ratio............................................3
Analysis of performance of company..............................................................................................5
Calculation of value of right............................................................................................................8
Impact of bonus issue on earning per share.....................................................................................8

ANALYSIS OF OPERATIONS OF COMPANY WITH THE HELP OF
ACCOUNTING RATIO
Table 1 calculation of financial ratios
OMR
Particulars Formula 2017 2016
Profitability Ratio
Trading profit ratio Trading profit/sales*100
Turnover 61494 52902
Trading profit 12366 10113
Trading profit ratio 20.1 19.1
Net profit Ratio net profit/sales*100
net profit 2635 1433
net profit ratio 4.3 2.7
Operating Profit Margin
Ratio Operating Profit/sales*100
Operating Profit 4403 3024
Operating Profit ratio 7.2 5.7
Liquidity Ratio
current ratio current assets/current liabilities
current assets 29021 24245
current liabilities 19483 18960
current ratio 1.5 1.3
Quick ratio
current assets-inventory/current
liabilities
current assets-inventory 27720 23194
Quick ratio 1.4 1.2
Activity Ratio
inventory turnover ratio cost of sales/ average inventory
average inventory opening stock +closing inventory/2
cost of sales 49128 42789
opening inventory 1051 867
closing inventory 1301 1051
average inventory 1176 959
inventory turnover ratio 41.8 44.6
In days 8.7 8.2

receivable turnover ratio
credit sales/ average account
receivables
average account receivables opening debtors +closing debtors/2
credit sales 61494 52902
opening trade receivables 8543 6443
closing trade receivables 10136 8543
average account receivables 9339.5 7493
receivable turnover ratio 6.6 7.1
In days 55.4 51.7
payable ratio cost of sales/ average account payable
average account payable opening creditors +closing creditors/2
opening trade payables 15257 12045
closing trade payables 15474 15257
average account payables 15365.5 13651
payable ratio 3.2 3.1
In days 114.2 116.4
Growth Ratio
Sales Growth ratio (sales of Y2- Sales of Y1)/Sales of Y1
Sales 61494 52902
Growth 8592 -8199
Ratio 16.2 -13.4
Profit growth ratio Profit of Y1-Profit of Y2/Profit of Y1
Profit 2635 1433
Growth 1202 -1045
Ratio 83.9 -42.2
Gearing ratio
Interest Coverage ratio
Earnings before interest and tax/
Interest Expenses
EBIT 3549 2184
Interest Expenses 199 160
Interest Coverage ratio 17.8 13.7
Debt to equity ratio Total Debt/total equity
Total Debt 30833 28011
Total Equity 7766 5641
Ratio 4.0 5.0

ANALYSIS OF PERFORMANCE OF COMPANY
Ratio analysis is the good method by which performance of organizations can be evaluated. It
assists in the study of the financial performance of the company by considering its several crucial
areas, such as liquidity position, capital structure analysis and profitability area (Edwards,
Schwab, & Shevlin, 2015). In the given study, the operations of the company, Hypercomputer
are evaluated by computation of accounting ratios like profit ratio, activity ratio, liquidity ratio,
solvency ratio and growth ratio.
The profitability ratio evaluates the capability of the company to generate profit relative to its
cost and expenses. It shows the manner in which company utilizes its asset to create earnings and
worth to shareholders (Minnis, & Sutherland, 2017). In this problem, the profitability of
hypercomputer is evaluated by computing the trading profit ratio, net profit ratio, and operating
profit margin ratio. The trading profit ratio calculates the marginal profit of the company. By
considering the above ratios, it has been drawn that in the year 2016, the GP ratio was 19.1% and
in the year 2017, it was 20.1%. There is improvisation the gross profit of the company, and it is a
good indication for the trading performance. The reason behind the same may improvisation in
supplier and sales strategy and efficiency in the consumption of goods which leads to
improvement in the gross margin of the company (Jacobson, & Von Schedvin, 2015). The
performance of company with respect to generation of profit can be determined by net profit
ratio, which considers the direct as well as an indirect cost. By considering the data of ratio
analysis, as compared with the earlier year, the profit generation capacity of company has been
improved. The reason behind the enhancement of profitability is due to increment in the other
income of the company (Tayeh, Al-Jarrah, & Tarhini, 2015). Further, profit generation capacity
of company due to its operations can be measured by Operating Profit Margin Ratio. By

analyzing the data, it has been evaluated that operating profit margin is better in the current year
by making the comparison with earlier year. There is a possibility that the company expanded its
operations, and by which profit from operations has been enhanced (West, & Bhattacharya,
2016).
Liquidity ratio shows whether a company can meet its obligation by using its current asset. In
this problem, the liquidity position of the company measured by the computation of the current
ratio and quick ratio. The current ratio reflects whether a company can pay its obligation by
using the current asset as and when they arise (Glasserman, & Young, 2015). The ideal current
ratio of the company should be 2:1, which means it should have a double current asset as
compared with its current liabilities. By considering the above calculations, it has been analyzed
that the company does not have an optimum current ratio, but the liquidity position of the
company in the year 2017 was good as compare with the year 2016, due to the higher current
asset ratio in the year 2017. Further, the liquidity position also determined by computation of
Quick Ratio. However, this ratio measures the obligation to pay current liabilities through quick
asset (Abbott, & et al. 2016). Therefore, the inventory is not considered in the computation of
quick ratio because for conversion of inventory value in cash, the company may take time. In the
case of hypercomputer, there is also an enhancement in the quick ratio. The reason behind the
improvement in liquidity position is a reduction in current liabilities (Kim, & et al. 2016).
The activity ratio measures the capability of the firm to convert its balance sheet accounts in cash
or in revenue (Storey, Keasey, Watson, & Wynarczyk, 2016). It shows how the company
effectively utilizes its asset to generate the revenue of the company. Inventory turnover ratio
shows, in how many days company can sell its inventory (Carbo‐Valverde, Rodriguez‐
Fernandez, & Udell, 2016). Hypercomputer takes around 8 and 9 days to sell its inventory.

Account receivable ratio measures the capability of firm to give credit and collect the payment
from customers in a timely manner (Michelon, Pilonato, & Ricceri, 2015). in the year 2016,
Hypercomputer granted around 52 days credit period to its customers, and in the year 2017, it
granted 55 days credit period. For the enhancement of revenue, the company may change its
credit policy and increased the credit period. Moreover, the payable ratio helps in determining
the short term liquidity position of the company (Ge, Lin, & Pearson, 2016). It shows the credit
period availed by the company from its supplier. The difference in the payable ratio of both years
is very low; it shows the consistent policy of credit given by the supplier (Appelbaum & et al.
2017).
By analyzing the growth ratio, it has been seen that, although in the year 2016, there is a
reduction in the sale, however in the year 2017, the sales of the company increased by 16.2% as
compared with the previous year. The reason behind the improvement in the sale is good
strategic planning, promotional technique, and discount offered by the company (Christensen,
Nikolaev,& Wittenberg‐Moerman, 2016). Similarly, in the year 2016, there is a reduction in
profit growth ratio; however, in the year 2017, the company significantly improved its financial
performance. There is 83.9% growth in the profit in the year 2017 as compared with its previous
year.
Gearing ratio shows the equity and debt used to purchase the assets. In other words, it depicts the
ratio of the debt as compared with the equity. The range of the standard gearing ratio is lies
between the 25%- 50%, which is considered as good proportion of debt and equity for a good
and sound organization (Loughran, & McDonald, 2016). The interest coverage ratio shows the
capacity of company to pay the amount of interest levy on the borrowed funds. If the ratio is less
than one, then for the payment of interest, problem may arise to company (Appelbaum, Kogan,

Vasarhelyi, & Yan, 2017). On the basis of the above calculations, it has been seen that the
company has a high-interest coverage ratio, it means the company can pay interest on its debt
several times. Further, the debt to equity ratio shows the proportion of debt relative to its equity.
In the year 2016, the company has five times its debt as compared with its equity, which is
regarded as risky. Further, in the year 2017, the percentage of debt relative to its equity has
reduced, which leads to a reduction in the risk to the company (Guay, Samuels, & Taylor, 2016).
By considering the accounting ratio, in the year 2017, profit generation capability of company
has been improvised as compared with the year 2016. Further, there is sufficient liquidity
available in the company, by which it can pay its debt as and when they become due. Further,
there is consistency in the activity ratios; it leads that company effectively utilizing its asset in
the generation of its profits and revenue (Beck, Chen, Lin, & Song, 2016).
CALCULATION OF VALUE OF RIGHT
Face value of equity shares = OMR 1
Existing Market Price of Share = OMR 7.5
Price of right shares = OMR 4.3
Company issues right shares in the ratio of 4:5
Value of right = (Number of right shares/total shares)*(Market value – issue price)
4/ (5+4)*(7.5-4.3)
= (4/9)* 3.2
=1.42

IMPACT OF BONUS ISSUE ON EARNING PER SHARE OF COMPANY
Bonus shares are allotted by the company to its present shareholders. These shares are issued
without any consideration. There is no change to the resources, which are applied by the
company for generating the value to the shareholders (Kim, & Ng, 2017). On the contrary, if the
shares are issued for cash, then there is a change in the value of resources. There are several
reasons for which company issues bonus shares to its shareholders. With this aspect, to pay the
reward to its investor, company issues bonus shares. By this, the investor gets additional shares,
without any consideration and their value of an investment will increase. Further, by allotment of
bonus shares, the number of shares increased, which leads to enhancement in the trading and
increment in the participation by the traders (Cheng, Harford, & Zhang, 2015).
Moreover, by issuing the bonus shares, the number of shares will increase; however, the profit
remains the same; thus, earning per share will reduce. It has been assumed that Hypercomputer
issue price is 1 OMR. Therefore the number of shares in 2017 is 11,797 and in 2016 is 11,472.
Since the company issues 25% of its existing reserve as its bonus issue, therefore the number of
shares by a bonus issue, in the year 2017 is 6186 (24,744*25%), and in the year 2016 is 5527.5
( 22110*25%)
Calculation of earnings per share before the issue of bonus share
Table 2 calculation of earnings per share before the issue of bonus shares
2017 2016
Earnings available to equity shareholders OMR 2635 OMR 1433
Number of equity shares 11797 11472
EPS 0.22 0.12

Calculation of earnings per share after the issue of bonus share
Table 3 calculation of earnings per share after the issue of bonus shares
2017 2016
Earnings available to equity shareholders OMR 2635 OMR 1433
Number of equity shares 11797 11472
Bonus Shares 6186 5527.5
Total number of equity shares 17983 16999.5
EPS 0.15 0.08
By considering the above analysis, it has been seen that there is a decline in the earning per share
after the issue of bonus shares by the company because of the increase in a number of
outstanding shares. However, the value of shareholders does not reduce by additional bonus
shares (Sharafoddin, & Emsia, 2016).
In the year 2017, if an investor holds 11,797 shares, then he/she earn 0.22 per share. Total
earning by the investor will be 2635 (11797*.22). After the bonus issue, the same investor holds
17983 shares by getting additional shares in the form of bonus shares. In such a case, he/she earn
0.14653 per share. Then, total earnings by the investor will be 2635 (17983*0.14653). Similarly,
in the year 2016, if investors hold 11472 number of shares, then he/she earn 0.12 per shares.
Total earning by the investor will be 1433 (11472*0.12). After the issue of bonus shares, the
investor gets the additional shares, and the number of shares held by the investor will 16999.5. In
such a case, they earn 0.0843 per share. The total earnings of the investor will be 1433
(16999.5*0.0843).

On the basis of this, it has been observed that even the earning per share reduced by issuing the
bonus shares, but the value of investors does not reduce, because the investor gets additional
shares and by which there earning remains the same (Adnan, Jan, & Sharif, 2015).

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