Financial Analysis of a Company

The assignment provides a detailed financial analysis of a company over two years (2015 and 2016). It includes calculations for key financial ratios like Debt to Equity Ratio, Current Ratio, Quick Ratio, Return on Assets, and Average Collection Period. The working notes explain the calculation methodology for each ratio and provide insights into the company's financial health. Areas analyzed include liquidity, solvency, profitability, and asset management.

Running Head: Financial Statement Analysis
RATIO ANLYSIS OF
E & A LIMITED

Financial Statement Analysis
1
Table of Contents
Ratio Analysis........................................................................................................................................2
Comments on company’s financial position..........................................................................................3
Impact of ratio analysis on audit...........................................................................................................4
References.............................................................................................................................................5
Appendix...............................................................................................................................................6

Financial Statement Analysis
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Ratio Analysis
RATIOS 2016 2015
*All the amounts are in AUD ($)
Current Assets
Ratio= Current Assets 62049 60974
Current Liabilities 60180 87826
1.03 0.69
Quick Assets Ratio= Quick Assets(WN 6) 24779 21936
Current Liabilities 60180 87826
0.41 0.25
Receivables
Turnover Ratio = Net Credit Sales (WN4) 23250 19970
Average Accounts Receivable (WN3) 21952 23194
1.06times 0.86times
Return on Assets = Net Income (WN) (14721) (21063)
Average Annual Assets (WN 5) 172381 170650
(8.54%) (12.34%)
Return on Equity = Net profit after Tax (19863) (24421)
Shareholder’s Funds(WN2) 28759 48622
(69%) (50.2%)
Debt Equity Ratio= Total Debt (WN1) 140599 126781
Equity 28759 48622
4.88 2.60
Debt to Asset = Total Debt (WN1) 140599 126781
Total Assets 169358 175403
0.83 0.72

Financial Statement Analysis
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Net Profit Ratio= Net profit after Tax (19863) (24421)
Net Sales 161864 198034
(12.27%) (12.33%)
Comments on company’s financial position
Use of ratio analysis to Comment on company’s financial position in following areas:
LIQUIDITY
Liquidity of any company can be defined as its ability to repay its financial obligations
whenever they are due. The current, quick and debt equity ratios determines the liquidity
position of the company. Current ratio indicates the company’s ability to repay its short term
debt obligations from its current assets without having any need to dispose of other revenue
generating assets. Quick ratio indicates the firm’s ability to repay its current liabilities using
quick assets. From the above analysis it can be said that the company is trying to improve
liquidity position of its business as both of its ratios have increased in year 2016 in
comparison to year 2015. The ideal current ratio is considered to be 2: 1 (Drake & Fabozzi,
2010). But the company’s current ratio in 2016 is just 1.03:1 which is considerably low. Also,
the debt equity ratio in 2016 has been increased by 2.28 times when compared to year 2015.
An increase in this ratio indicates that the company is facing higher risk as the potential
investors are not ready to invest their funds in the company and therefore the company is
raising funds from its creditors which imposes higher liquidity risk on the company. Liquidity
position thus cannot be considered as appropriate. Hence, the company is required to
maintain more of current assets to meet its short term debt obligations.
PROFITABILITY
Profitability is defined as the company’s position when it is efficient enough to generate
returns (profits) on its total assets and investments of investors. It also indicates the amount of
income a company generates from every dollar of sales (Fridson & Alvarez, 2011). As the
return on assets and return on equity are found to be negative in both the years i.e. 2016 and
2015 (from the above calculations) it can be analysed that company is inefficient in earning
adequate returns by utilising its assets and the funds of investors. The current net profit
margin is also negative indicating the losses company is facing. Even when the loss has
reduced by $ 4558000 the net profit ratio has declined by .06% because income of the

Financial Statement Analysis
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company was not enough to cover its expenses. It shows that the profitability position of the
company is below average. Therefore it needs to improve it by making proper utilisation of
investor’s funds and its assets.
SOLVENCY
Solvency position of a company determines its ability to repay all its financial obligations
whether short term or long term (Babalola & Abiola, 2013). Solvency ratio of debt to asset
measures the quantum of total assets financed by the creditor’s loan compared to the quantum
of asset financed by investor’s funds. The company with higher ratio is riskier since it is
involves higher interest cost. An increase in 2016’s ratio means that the finance expenses
have increased. The report also shows increase in finance from $480300 to $7356000
indicating that company relies heavily on creditor’s to expand business.
ACTIVITY
Activity ratios are used to determine the company’s ability to turn its assets liabilities into
cash or in sales. Higher the activity ratios higher is the firm’s efficiency to convert its assets
and liabilities into cash (Brigham & Houston, 2012). In the present case it can be said that the
receivable turnover ratio of year 2016 has increased by .20 times in comparison with the year
2015. It indicates that the firm is efficient enough to convert its credit sales into cash by
collecting cash from the customers on time.
Impact of ratio analysis on audit:
Ratio Analysis helps the auditors to undertake audit process by using functions like analytical
procedures. Analytical procedure enables the auditor to compare and contrast various facts
which are the results of ratio analysis. In the present case of E&A Limited the ratio analysis
has helped the auditors to compare the results of previous year with that of current year. With
the help of ratio analysis the auditor could understand the root causes of deviations that
resulted in degrading the company’ financial performance. Moreover, this analysis has
enabled the auditor to identify the key areas were users attention is required so that it can
influence their decision.

Financial Statement Analysis
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References
Babalola, Y.A. and Abiola, F.R., 2013. Financial ratio analysis of firms: A tool for decision
making. International journal of management sciences, 1(4), pp.132-137.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage
Learning.
Drake, P.P. and Fabozzi, F.J., 2010. Financial ratio analysis. Handbook of
Finance.
Fridson, M.S. and Alvarez, F., 2011. Financial statement analysis: a
practitioner's guide (Vol. 597). John Wiley & Sons.

Financial Statement Analysis
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Appendix
Working Notes
1) Total Debt = Current Liabilities + Non-Current Liabilities
Year 2016 2015
Current Liabilities 60180 87826
Non-Current Liabilities 80419 38955
Total 140599 126781
2) Shareholder’s Equity= Share Capital + Reserves + Retained Earnings
Year 2016 2015
Share Capital 70652 70652
Reserves 74 74
Retained Earnings (41967) (22104)
Total 28759 48622
3) Average Account Receivable = (Opening Receivables + Closing Receivables)
2
Year 2016 2015
Opening Receivables 20330 26058
Closing Receivables 23573 20330
Total 43903 46388
Average account receivables (20330+23573)/2 (26058+20330)/2
21952 23194
Account Receivables includes both trade and other receivables.
4) All sales are assumed to be credit sales.
5) Average Annual Assets= Opening Assets + Closing Assets
2

Financial Statement Analysis
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Year 2016 2015
Opening Assets 175403 165897
Closing Assets 169358 175403
Total 344761 341300
Average Annual Assets 172381 170650
6) Quick Assets= cash + cash equivalents + short term investments + current receivables
Year 2016 2015
Cash & Cash Equivalents 1206 1606
Trade and other receivables 23573 20330
Total 24779 21936
7) Net Income = Profit after Tax + [(Interest Expenses-Interest Income) *1-Tax Rate]
Year 2016 2015
Profit after Tax (19863) (24421)
Net Finance Expenses (net of tax) 5142 3358
Net Income (14721) (21063)