Ratio Analysis | Financial Analysis

Financial Analysis

ACCOUNTING 1
Introduction
The main aim of this paper is to understand the theory of ratio analysis. It helps to evaluate the
financial position of the company by evaluating the ratio’s. In this report, Wesfarmers has been
taken into consideration to evaluate the financial position. Woolworths is taken as the
competitive company to evaluate the financial performance.
Financial Analysis Ratio
Profit Margin- It is a measure of profitability. In the case of Wesfarmers, the ratio indicates that
the profit of the business is increasing in the year 2017 from the last year 2016 that is 407. But in
the year 2018, the profit ratio of the business is decreasing by 0.02 from the year 2017
(Wesfarmers, 2018). The sales amount is decreasing from the last year due to which the profit of
the company is reducing.
Asset Turnover- Asset Turnover is an efficiency ratio that evaluates the capacity of the business
to generate sales from the assets. It has been seen that the asset turnover of the business is
increasing in every coming year. The company is increasing with the ratio 1.61, 1.68, and 1.73 in
the year 2016, 2017, and 2018 respectively (Morning Star, 2018a).
Current Ratio- Current Ratio of the corporation is the capability to pay its short-long term
obligations. Current ratio of Wesfarmers is decreasing with the ratio in the year 2018 which
reflects that the firm capacity to pay its short term liabilities. But in the case of Woolworths, the
liquidity ratio of the corporation is decreasing with the ratio’s 0.83, 0.79 and 0.78 in the year
2016, 2017 and 2018 respectively.

ACCOUNTING 2
Quick Ratio- Quick Ratio refers the company’s capacity to pay the short term obligations. As
per the evaluation of Wesfarmers, the capability of the business is fluctuating to pay its short
term duties as same as Woolworths (Morning Star, 2018b).
Debt Ratio- Debt Ratio measures to pay all liabilities by using the assets. Debt ratio of the
Wesfarmers is decreasing which indicates the performance is improving as the liability is
reducing.
Days Inventory- Days Inventory evaluates the average number of days the organizations holds
its inventory before selling it. Inventory ratio of Wesfarmers is increasing in every year as
compare to Woolworths (Woolworths, 2018).
Days Debtors- Days Debtors ratio shows the average number of days that the firm collects from
its customers. It is observed that Wesfarmers takes more time to collect the money from
customer to Woolworths.
Days Creditors- Days Creditors defines the average number of days in which the company pay
the amount to its creditors. Wesfarmers pays the debt amount quickly as compare to its
competitors Woolworths as the number of days of days creditors decreasing in every year.
Cash Cycle Result
Cash Cycle Result methods that states the amount of time, or days taken by the company to turn
its resources inputs into cash. The formula of evaluating the cash cycle result= DIO+DSO-DPO
(CFI, 2018).
As per the evaluation, Wesfarmers takes more time to turn its resources into cash as compare to
Woolworths. In the year 2017, Wesfarmers takes more time as compare to 2016 and 2018. In the