Financial Ratio Analysis Example

This solved assignment example presents a detailed analysis of financial ratios for a company across three years (2014, 2015, and 2016). It includes liquidity ratios like the current ratio and quick ratio, profitability ratios such as gross profit margin and return on equity, solvency ratios including the debt-equity ratio and interest coverage ratio, efficiency ratios like inventory turnover and debtor turnover, and investment ratios like dividend yield. The example provides specific calculations for each ratio, allowing readers to understand how these metrics are computed and interpreted.

Running Head: Financial performance analysis 1
Financial performance analysis

Financial analysis 2
Part-B
Executive summary
With the increasing ramified economic changes, investors use various financial tools such
as Ratio analysis, capital structure analysis and share price analysis to take their investment
decisions. This report reflects the financial performance and capital structure of APN Outdoor
Company since last three years.

Financial analysis 3
Table of Contents
Part-B...........................................................................................................................................................2
Executive summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Comparing Firm’s Capital Structure.........................................................................................................4
Analysis of Financial Ratios of AMC Outdoor Company...........................................................................7
Significant Changes in the Capital Structure in Past Three Years.............................................................7
Wealth Maximization in Past Three Years...............................................................................................8
Importance of Minimization of the Cost of Capital..................................................................................8
Recommendations for Lowering the Cost of Capital...............................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10

Financial analysis 4
Introduction
This report contains financial data of APN Outdoor Company and depicts how it
performs since last three years. There are several financial tools such as ratio analysis, capital
structure analysis, NPV IRR which could be used to gauge the financial performance of
company. This AMC Outdoor Company is international Australian company which has engaged
in providing advertisement and media services to clients.
Comparing Firm’s Capital Structure
Capital structure could be defined as partition of company for raising capital through
equity, debt and long term loans. It is evaluated that AMC Outdoor Company has capital
structure of 32% debt and 68% equity capital. Nonetheless, AMC Outdoor Company has high
financial risk and reduced its overall cost of capital by having more debt in its capital structure
(Finance. Yahoo, 2017). There is below WACC has been computed as below (Brigham &
Ehrhardt, 2013).
Cost of Equity
CAPM Model
Risk free rate of
return 2.40%
Beta 1.3

Financial analysis 5
Market Rate of
Return 7%
Cost of Equity 8.38%
Cost of debt
Interest after tax 2956100
Debt 103000000
Cost of debt 2.87%
Weights
Debts (Loan) 103000000
Equity 222334000

Financial analysis 6
Total 325334000
Weighted Average Cost of Capital (WACC)
Weight
Cost
(%) Weighted Cost
Debt 0.32 2.87% 0.91%
Equity 0.68 8.38% 5.73%
Cost of Capital (WACC) 6.64%
As per the data computed under WACC of company it is inferred that cost of capital of
company is 6.64%. Debt to capital structure of AMC Outdoor Company is 32% debt and 68%
equity capital. Another rival company in same industry is QMS Media Company which has
shown debt to capital ratio 22: 78%. This QMS Media Company has low level of financial risk
and high cost of capital. AMC Outdoor Company needs to have debt to equity ratio 30:70 with a
view to increase its overall business efficiency and reducing financial risk (Finance. Yahoo,
2017).

Financial analysis 7
Analysis of Financial Ratios of AMC Outdoor Company
Ratio analysis of company reflects the relation between two factors of business. APN
Outdoor Company has reduced its current ratio by .65% in 2017 as compared to last three year
data. Quick ratio of company has also decrease to .55 in 2017 since last three years. The gross
profit of company has increased to 20% in 2016 from the loss of 7% which company had in
2015. Return on capital employed has also increased to 20% to create value of equity investment
of investors. Interest coverage ratio of company has gown down to zero. This has reduced due to
the no interest payment. Efficiency ratio of company has also managed by APN Outdoor
Company to reduce the overall cost of capital. Inventory turnover ratio has been maintained zero
due to zero inventories in balance sheet. In addition to this, creditor’s turnover ratio of company
has gone up to 40% with a view to reduce the amount blockage in its value chain activities. This
will reduce the overall cost of capital of company. Dividend payout of company has increased by
40% since last three years which reflects that company has been creating value on the investment
of investors (Brigham & Gerhardt, 2013).
Significant Changes in the Capital Structure in Past Three Years
Capital structure of AMC outdoor company is accompanied with equity and debt portion.
Equity capital of company is $58.15, $63.74, and $59.64 million in 2014, 2015 and 2016
respectively. There is increment in debt portion by 5% since last three years. AMC Company had
AUD$ 125 million debt funding in 2015. After that it went down to AUD $ 97 million in 2015.
After that, it increased to AUD $ 133 in 2016 (Finance. 2017). This reflects that company has
increased its financial risk to reduce the overall cost of capital (Innocent, Mary & Matthew,
2013)

Financial analysis 8
Wealth Maximization in Past Three Years
After evaluating the annual report of company it is observed that stock price of company
has increased by 200% since last three years. It shows that company has high level growth and
increased revenue. All the investors who have invested their money in equity capital of company
have created wealth on their investment by 200% since last three years (Brigham & Ehrhardt,
2013).
Importance of Minimization of the Cost of Capital
Minimization of cost is the major part for the business success of APN Outdoor
Company. It is evaluated that if company could minimize its overall cost of capital then it will
increase the overall earning, creation of core competency and increased brand image. However,
company needs to evaluate the financial leverage before reducing cost of capital (Finance.
Yahoo. 2017)
Recommendations for Lowering the Cost of Capital
It is evaluated that lowering cost of capital of company could be done by AMC Outdoor
company by increasing the debt portion or opting for those sources of capital which has low level
of cost associated with it. Nonetheless, financial risk is the major factors which should be
considered by AMC Outdoor Company before lowering down its cost of capital (Kaur & Gupta,
2015). Company should shuffle its capital structure to establish proper level of capital to
maintain risk and cost in effective manner (Xu, et al. 2014).

Financial analysis 9
Conclusion
This report reflects that APN Outdoor Company has high growth and created wealth
maximization on the shareholders’ investment. However, company should inject more money in
its business functioning with a view to increase its overall profit and effectiveness of business in
determined approach. Lower down the cost of capital could be risky for APN outdoor company
as it will increase the overall financial risk.

Financial analysis 10
References
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage
Learning.
Finance. Yahoo. (2017). APN Outdoor Group Limited (APO.AX). Retrieved September 16, 2017 from,
https://finance.yahoo.com/quote/APO.AX/financials?p=APO.AX
Finance. Yahoo. (2017). QMS Media Limited (QMS.AX). Retrieved September 16, 2017 from,
https://finance.yahoo.com/quote/QMS.AX/balance-sheet?p=QMS.AX
Innocent, E. C., Mary, O. I., & Matthew, O. M. (2013). Financial ratio analysis as a determinant of
profitability in Nigerian pharmaceutical industry. International journal of business and
management, 8(8), 107.
Xu, W., Xiao, Z., Dang, X., Yang, D., & Yang, X. (2014). Financial ratio selection for business failure
prediction using soft set theory. Knowledge-Based Systems, 63, 59-67.

Financial analysis 11
Appendix
Financial analysis of DWC company
Particulars 2014 2015 2016
Fiscal year ends in June AUD$ '000
AUD$
'000
AUD$
'000
AUD in Million except per share
data
Total Revenue 250 300 330
COGS 80 80 80
Operating Profit/(Loss) 242 292 324
Other expenses 228 230 252
Finance cost 30 4 3
Net profit -16 58 69
Current Assets 76 85 94
Inventory 1 1 1
Average Inventory 1 1 1
Trade receivables/Debtors 58 63 69
Average Debtors 37 39 42
Total Assets 372 389 451
Dividend Paid 9 39 32
Current Liabilities 31 45 50
Trade Payables/Creditors 6 2 2
Average Payables 3 4 2
Total Liabilities 156 141 182
Capital Employed 341.0 344.0 401.0
Long term loans 125 97 133
Shareholders' Equity 216 248 269
Dividend per Share (DPS)
0.0416666
7
0.157258
1
0.11895
9
Earnings per Share (EPS) -0.7 0.25 0.29
Price per Share 10 10 10
Computation of ratio analysis
Liquidity ratio 2014 2015 2016
Current ratio 2.4516129 1.8888889 1.88
Quick ratio 2.41935484 1.8666667 1.86

Financial analysis 12
Profitability ratio 2014 2015 2016
Gross Profit Margin 0.968
0.973333
3
0.98181
8
Net Profit Margin -0.064
0.193333
3
0.20909
1
Return on Capital Employed
-
0.0469208
2
0.168604
7 0.17207
Return on Equity
-
0.0740740
7 0.233871
0.25650
6
Solvency Ratios 2014 2015 2016
Debt-Equity Ratio
0.7222222
2
0.572580
6
0.68029
7
Interest coverage Ratio
0.1239669
4
0.013698
6
0.00925
9
Efficiency Ratios 2014 2015 2016
Inventory turnover ratio
0.0074390
9
0.007439
1
0.00743
9
Debtor turnover ratio
6.8493150
7
7.692307
7
7.85714
3
Creditor turnover ratio
26.666666
7 20 40
Investment Ratios 2014 2015 2016
Dividend Yield Ratio 0.036 0.13 0.09697

Financial analysis 13