Financial Performance and Position of R Plc: Ratio Analysis

This report analyzes the financial performance and position of R Plc through ratio analysis of profitability, liquidity, solvency, efficiency, and investment ratios. It also provides recommendations for R Plc to improve its financial position and performance.

Business Performance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Evaluating and commenting on the financial performance and position of R plc.......................3
CONCLUSION................................................................................................................................6
RECOMMENDATIONS.................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Financial statement analysis may be served as a process which business unit and its
stakeholders undertake for taking significant decisions. Ratio analysis tool helps in summarizing
and interpreting final accounts under different categories. This report will shed light on the
extent to which R Plc is performing better over S Plc.
Evaluating and commenting on the financial performance and position of R plc
Ratio analysis of R and S plc for the period of 2020 is enumerated below:
Profitability ratio
This financial metric helps in evaluating company’s ability in relation to generating
returns by taking into account sales, operating expenses, shareholder’s equity etc (Miransyah and
Dempo, 2021).
Particulars Formula R Plc Figures (in £)
S Plc Figures (in
£)
Total assets 26806
Currents
liabilities 9466
Capital employed 17340
Gross profit 10,880
Operating profit 5,313
Sales 26,245
GP ratio Gross profit / sales * 100
10,880 / 26,245 *
100
= 41.46% 38%
OP ratio
Operating profit / sales *
100
5313 / 26,245 * 100
20.2% 18%
ROCE EBIT / capital employed
5313 / 17340 * 100
= 30.6% 25%
The above depicted table shows that GP and OP ratio of R Plc was higher in the period of
2020 such as 41.46% & 20.2% respectively. In addition to this, ROCE of the firm was also
higher in comparison to S Plc. Referring all such aspects it can be said that profitability position
of R Plc was good. It shows that business unit exerted effectual control on both direct and

indirect expenses which results into high profitability. Along with this, higher ROCE also entails
that business generated enough returns by using capital invested with the help of sound strategic
and policy framework.
Liquidity ratio
It presents company’s ability in relation to pay off debt, when they become due, by using
current assets (Bunker, Cagle and Harris, 2019).
Particulars Formula R Plc Figures (in £)
S Plc Figures
(in £)
Current assets 15089
Current
liabilities 9466
Stock 6983
Prepaid
expenses 0
Current ratio CA / CL
15089 / 9466
= 1.59 2.1
Quick ratio
CA - (stock + prepaid
expenses) / CL
15089 – (6983 + 0) /
9466
= 0.86 0.95
Outcome of ratio analysis clearly exhibits that liquidity of R Plc was not good as
compared to competitor. According to ideal ratio, business unit must have 2 current assets in
against to 1 liability. Hence, current ratio of R Plc, such as 1.59, was far from ideal measure to
some extent. By taking some effectual measures regarding current assets maintenance R Plc can
improve working capital. Besides this, quick ratio helps in identifying the extent to which firm is
able to meet current obligations by converting assets into cash. As per the idea ratio of .5:1, it
can be entailed that liquidity position of both the firms were good.
Solvency ratio
This ratio helps in measuring financial health of the company by placing emphasis on
aspect that whether current cash flow is enough for meeting long term liabilities or not (What is a
Solvency ratio?, 2021).

Particulars Formula
R Plc Figures
(in £)
S Plc Figures (in
£)
Long term debt 2800
Shareholder's
equity 14540
Debt-equity
ratio
Long term debt / shareholders’
equity
2800 / 14540 *
100
= 19% 34%
By applying ratio analysis tool, it has found that R Plc raised most of its funds from
equity sources rather than debt. Both the funding sources impose significant cost in front of the
company. In the case of debt, business unit is liable to make interest payment irrespective of
profit generation. On the other side, high equity issuance enhances shareholder’s interference in
decision making and thereby affects operational aspects. Currently, capital structure of R Plc
cannot said to be sound in against to both ideal ratio and competitor firm.
Efficiency and investment ratios
Investors make more focus on analyzing investment ratio before investing money into
company’s stock (Dai and Zhu, 2020). In this regard, EPS, PER etc helps in whether investor
should invest in the company’s shares or not.
Particulars Formula R Plc Figures (in
£)
S Plc Figures (in
£)
EBITDA 5313
Interest expense 980
Total earnings 1653
outstanding
shares 20000
Share price 1.6
Interest Cover EBITDA / Interest expense 5313 / 980
= 5.42 3.1X
Dividend Cover EPS / DPS 0.08 / 0.069
= 1.2 2.9X

Earnings per
share
Total earnings / outstanding
shares
1653 / 20000
= 0.08 21p
PER Share price / EPS 1.6 / 0.08
= 19.36 8X
Tabular presentation presents that, in the accounting period 2020, R Plc was highly able
in relation to paying interest expenses from its operating profit. In 2020, dividend cover of R & S
Plc accounted for 1.20 and 2.9X significantly. It entails that S Plc is more able to pay dividend to
its shareholders from net earnings. Dividend cover place direct impact on company’s brand
image and investor’s decision making. Thus, for attracting shareholder’s R Plc needs to enhance
EPS and dividend cover ratio. Besides this, higher P/E ratio of R Plc entails that share prices of
company’s stock was high as compared to its earnings. Thus, in order to entice decision making
of investors firm need to make modifications in the current framework.
CONCLUSION
By summing up this report, it can be stated that, in FY 2020, profitability and liquidity
position of R Plc was good. Comparatively, R Plc performed well in the concerned year as
compared to its rivals. However, business unit need to take some measures so that business unit
can get desired level of outcome or success.
RECOMMENDATIONS
By doing assessment, it has identified that R Plc is performing better in monetary terms
as compared to S Plc. In order to strengthen financial position and performance R Plc requires to
undertake following measures:
 R Plc should focus on employing social media marketing as well as budgetary control
which helps in cost reduction and maximizing sales. Budgetary control helps in reducing
cost to the significant level by eliminating unnecessary activities and thereby enhances
profitability. Thus, by using improved profitability business organization can enhance
dividend cover ratio.

 Further, for improving liquidity position company should focus on maintaining current
assets by keeping in mind ideal ratio of 2:1. Through this, R Plc would become able to
perform daily operations smoothly without any interruptions.
 For ensuring efficient capital structure R Plc is required to follow ideal framework.
Hence, in the near future, at the time of raising fund company should issue 1 debt in
against to 2 equities.

REFERENCES
Books and Journals
Bunker, R. B., Cagle, C. and Harris, D., 2019. A liquidity ratio analysis of lean vs. not-lean
operations. Management Accounting Quarterly. 20(2). pp.10-16.
Dai, Z. and Zhu, H., 2020. Forecasting stock market returns by combining sum-of-the-parts and
ensemble empirical mode decomposition. Applied Economics. 52(21). pp.2309-2323.
Miransyah, G. G. and Dempo, S. R. S., 2021. Profitability Ratio Analysis at PT. Medikaloka
Hermina, TBK. BINA BANGSA INTERNATIONAL JOURNAL OF BUSINESS AND
MANAGEMENT. 1(1). pp.60-67.
Online
What is a Solvency ratio? 2021. Online. Available through: <
https://corporatefinanceinstitute.com/resources/knowledge/finance/solvency-ratio/>.