Financial Analysis for Watley's Manufacturing Company Intro: Financial Statements

Financial Analysis for Watley’s Manufacturing Company
Intro:
Financial statements are reports that include statistics and information about the company and aid
management in evaluating the financial activities of the organization. by implementing the use of
financial ratio analysis, these statements help forecast the company's future growth. Financial ratios can
be used to evaluate a company's financial health.
Financial ratios can also measure the performance of a company for a certain accounting period and can
anticipate what the financial performance of the firm will be in the future. However, using ratio analysis
as a performance evaluation tool has a few drawbacks, since the figure that they provide are absolute
and not relative thus sometimes offering misleading information.
To begin with, the data derived from the previous accounting year's financial statements is underlined
as historical data, which implies that organizations cannot be certain that the same figures from
previous performance analysis would be maintained in the future. As a result, a ratio study for a single
period cannot always predict the company's performance would have the same corresponding future as
it had before. Furthermore, because financial statements are produced on a regular basis, another
limitation could be inflation within the market which they play a part in.
If there is inflation within the periods of accounting, the real prices will not be represented in the
financial accounts, making comparisons between periods impossible.The four basic categories of
financial ratios are as stated liquidity ratios, gearing ratios, activity ratios, and profitability ratios. The
goal of this article is to use these four financial ratios to analyze Watley's financial performance. In a
nutshell, Watley's is a tiny furniture manufacturing firm established in England that has 52 people and
specializes employed they specialize in putting together high-end furniture.
Overall, a financial analysis for Watley's will be undertaken in this report, with financial ratios being used
to calculate and then assess data for the years 2014 and 2015. This study evaluates the topic using both
primary and secondary data. Academic literature and financial information from Watley's Manufacturing
Company were used to compile the statistical results. Finally, a conclusion will be reached regarding the
company's financial health and what Watley's should change for the better of the companies financial
future.
 Ratio Analysis:
 Liquidity Ratios:
 Liquidity ratios are used by businesses to assess their cash situation and ability to pay off
all of their short-term commitments. Thus a company's liquidity is defined by how fast it
can liquidate assets, or how it's assets can be converted into cash quickly(Atrill and
McLaney, 2019). The Current and Quick Ratios, are the two most critical liquidity ratios.
The current ratio, on the one hand, assesses a company's capacity to pay current
liabilities with current assets. To put it differently, the current ratio examines the

Financial Analysis for Watley’s Manufacturing Company
company's liquid assets and compares them to its current liabilities (Armstrong, 2018).
The current ratio formula is caulcutated as followed:
Current Ratio=Current Assets ÷ Current Liabilities.
 The fast ratio, on the other hand, allows a corporation to test its liquidity more
precisely. This ratio assesses a company's liquidity without requiring any goods to be
sold (Rashid, 2018). The quick ratio formula is as follows:
Quick Ratio= (Current Assets – Closing Stock) ÷ Current Liabilities.
 When a company evaluates its liquidity, it must take into considration a number of
elements, including the company's own operations, its rivals, and the industry in which
it operates. A company with a low ratio, less than one, indicates that revenues are
falling. It means the company's assets are less than its liabilities, and as a result, it won't
be able to pay off its short-term bills (Atrill, Harvey and McLaney, 2002), And w hen the
ratio is greater than one, it indicates that the company is financially sound, meaning that
the present assets owned can be turned into cash to cover short-term debts (Atrill and
McLaney, 2019).
Liquidity ratios are greater than one in Watley's manufacturing, as demonstrated in
Table 1 for both 2014 and 2015.
Liquidity Ratios 2014 2015
Current Ratio = Current Assets ÷
Current Liabilities
360/270= 1.33:1 480/210= 2.28:1
Quick Ratio = (Current Assets –
Closing Stock) ÷ Current Liabilities
(360-90)/270= 1:1 (480-140)/210=1.62:1
Table 1.
 Gearing Ratios:
Organizations use this ratio to calculate the amount of cash collected through external
funding and to examine how day by day finaince are distrubutated In other words, it
evaluates a company's financing and compares equity capital to debt capital. The
gearing ratio can also be used to analyse how a company can pay off it's debts if they
arise in the future(Atrill, 2014). This is the formula used for the gearing ratio:
Gearing Ratio=Long Term Loan Capital or Non-Current Liabilities ÷ Capital Employed.
 A company having a high gearing ratio, above 50% is considered a high ratio, is thought
to be in financial danger due to high debts that have accumulated. A high ratio usually
reflects a larger debt-to-equity ratio, meaning that the company has more external
debt. The company is considered as being of excellently geared in this scenario.

Financial Analysis for Watley’s Manufacturing Company
Furthermore, a company with a low ratio, less than 25%, is thought to be more
financially sound because it has raised a large portion of its capital through equity. As a
result, it looks to pose fewer financial risks to outside investors and is classified as low
geared. Additionally, a gearing ratio of 25 to 50 percent is regarded standard and
indicates a solid, well-established business. Without a doubt, if the company's gearing
ratio is excessive, there are various options for lowering it and paying off the debt,
including selling stock, converting loans, or increasing profits (Atrill, Harvey and
McLaney, 2002).
Gearing Ratios 2014 2015
GR= non-current liabilities/Capital
Employed
200/ (1080+200) =0.16=16% 200/ (1220+200) = 0.14 = 14%
Table 2.
As indicated in Table 2, the gearing ratio for Watley's manufacturing in 2014 and 2015 was
less than 25, indicating that the company is financially secure and less hazardous for its
investors. The gearing ratio decreased from 2014 to 2015 as equity increased and non-
current liabilities stayed unchanged.
 Activity Ratios:
 This ratio is used to shows how a company us well equipped to convert it’s inventory
into cash, these ratios are kind of significant since they show how a company operates.
The Inventory turn over shows how well a company maintain their inventory through
holding and distribution. This ratio changes with the cost of products sold, how many
times the inventory is stocked and sold and all of this is over a period of time to
determine the Activity ratio (Atrill and McLaney, 2019).
When companies have bad inventory turnovers, this demonstrates that the company
has/will fail to sale in a period which it’s supposed to. Low sales might end up costing
the company looses and this is called overstocking, when the current inventory exceeds
the time, it’s needed to sell it. When the turnover ratio is high this helps us determine
that the company has high sale ratios, the corporation that can quickly change their
inventory into cash from sales are consider and highly regarded as investment havens.
Below is the Formula for calculating Activity ratio and Turnover:
Activity ratio=Sales or Costs of Goods Sold ÷ Inventory.