Interpret Financial Performance of Watley's: Key Financial Ratios Analysis

Running head: INTERPRET FINANCIAL PERFORMANCE
Interpret Financial Performance
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Author’s Note:

1
INTREPRET FINANCIAL PERFORMANCE
Computation of Key Financial Ratios
The financial performance of a business can be determined effectively with the help of
key financial ratios of the business. The main purpose of this assessment is to compute key
financial ratios for Watley’s and also determine the performance of the business during the
period. Ratio analysis can be defined as estimates which can be used by business for
understanding the financial performance of a business. Ratio analysis allows the business to
analyze different areas of performance of a business such as liquidity, solvency, gearing and
efficiency of a business (Carraher and Van Auken 2013). The computation of key financial ratios
of a business is shown in the table below:
Watley’s
Particulars 2014 2015
in (£000s) in (£000s)
Sales revenue A 3290 3520
Net Profit B 400 300
Total Current Assets C 300 480
Total Current Liabilities D 270 210
Inventories E 90 140
Total Assets F 1550 1630
Receivables G 160 260
Total Liabilities H 470 410
Net Profit Margin J=B/A 12.16% 8.52%
Current Ratio K=C/D 1.11 2.29
Average Receivable Turnover N=A/G 20.56 13.54
Debt Ratio O=H/F 0.30 0.25
Figure 1: (Table showing computation of Key Financial Ratios of Watley’s)
Source: (Created by the Author)
The above table shows computation of key financial ratios of Watley’s and the same can
be used by the business in analyzing the performance of the business. The ratios which are

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INTREPRET FINANCIAL PERFORMANCE
shown in the table above comprises of Net profit margin, Current ratio, Average Receivable
turnover ratio and Debt ratio of a business (Delen, Kuzey and Uyar 2013). The ratios of the
business effectively show the performance of the business for two years which are 2014 and
2015. The table which is shown above considers key financial information which is related to the
business for the year and on the basis of such information the ratios which are shown in the
above table is computed.
Part 2
Analysis of Key Ratios
The main purpose of this part is to analyze the ratios which are computed in figure 1
shown above and also interpret the financial performance of the business on the basis of the
ratios which are computed in the above figure. Ratio analysis is an important tool which helps
businesses to not only measure the performance of the business in different areas but also has a
significant role in decision making process (Weygandt, Kimmel and Kieso 2015). As the ratios
cover specific areas of liquidity, solvency, gearing and efficiency. The ratios which are shown in
the above table covers different area for performance of the business.
The net profit of the business is shown to be 12.16% for the year 2014 and the same is
shown to be 8.52% in 2015. The net profit ratio of the business is considered to be an important
financial indictor of business and investors are always looking for a positive net profit margin
and also looking for growth in net profit margin of the business. The net profit of Watley’s is
shown to have decreased in comparison to previous years estimate which is calculated in the
above table. This is not a good sign for the business and the management of the company needs
to effectively formulate a strategy which can improve the profitability of the business (Tayeh,