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(PDF) Understanding the limitations of financial ratios

   

Added on  2021-02-19

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CASE STUDY

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Background of the company........................................................................................................12. Evaluation of Financial analysis.................................................................................................1a. Ratio analysis...........................................................................................................................1b. Analysing the limitations and the problems associated to financial ratios..............................63. Investment appraisal ...................................................................................................................64. Potential acquisition of Nisa Retail Limited................................................................................9Rationale in selecting the Target company .................................................................................9Synergistic gain from the acquisition .......................................................................................10Explaining and evaluating the financing within the acquisition................................................10Assessing the risk and the uncertainties.....................................................................................10Potential implications.................................................................................................................10CONCLUSION..............................................................................................................................11REFERENCES..............................................................................................................................12

INTRODUCTIONAssociated British Foods has attained the financial success over the previous five yearsand now is seeking to expand and acquiring the other company in order achieve its long termobjectives with leading growth. The present report summarises the financial performance ofAssociated British Foods and the further analysis has been made in relation to the investment andthe evaluation regarding the acquisition of the Nisa.Background of the companyIt is the multinational British food processing retailer headquartered in London. It deals inthe ingredients division and is called as the second leading producer of the baker's yeast and thesugar and also produces the ingredients such as enzymes, lactose and the emulsifiers. 2. Evaluation of Financial analysisa. Ratio analysisProfitability ratio analysis NP ratio- It refers to the profitability ratio that reveals the income earned by theenterprise after making payment of all the costs and the expenses (Fallahpour, Lakvan andZadeh, 2017). It is been computed dividing the net profit with that of the net sales. Higher theratio, depicts the better position of the company. Year / companiesNestleAssociated British foods 201415.74%5.89%201510.18%4.16%20169.50%6.10%20177.97%7.80%201811.05%6.47%Interpretation- From the above table it has been interpreted that Net profit ratio of Nestleis greater than Associated British foods in all the years. This means that Nestle, a competitor ofAssociated British foods earns higher profits even after paying off all its expenses in relation tointerest, taxes and other costs. This in turn depicts that the performance of Nestle is much betterthan the Associated British foods. Liquidity ratio analysis1

Current ratio- It means the liquidity ratio that reflects the ability of the organization inmeeting it current obligations. It indicates the ways in which an entity can make effective use ofits short term assets in order to meet their current liabilities (Liu and et.al., 2019). It is calculatedby dividing the current assets with that of the current liabilities. The greater the ratio, better is theliquidity position of the firm. Year / companiesNestleAssociated British foods 20141.031.3520150.881.420160.851.4120170.891.6520180.951.63Interpretation- The above table highlights that current ratio of Associated British foods isgreater than its rivalry that is Nestle. It means that the liquidity position of Associated Britishfoods is sound or good in comparison to other company as its ratio is close to an ideal currentratio that is 2:1. Associated British foods has sufficient cash to meet its short term liabilities andare making an effective use of their current assets through proper management of workingcapital. Solvency/financial gearing ratio analysis Debt-equity ratio- It is the measure that describes the relationship in between the longterm debts and the shareholders funds within the organization (Gabric, 2018). In other words, itstates about the capital invested by the shareholders and the creditors. It shows the extenttowards which owners funds could meet the long term obligations of the company to itscreditors. Year / companiesNestleAssociated British Foods 20140.180.0920150.190.0920160.170.0920170.260.0720180.450.03Interpretation- From the above evaluation it has could be stated that financial health ofAssociated British foods is better than Nestle. This is because the debt-to -equity ratio ofAssociated British foods is lower than the ratio of Nestle and the lower the gearing ratio, better2

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