Financial Ratio Analysis and Interpretation
Added on 2020-02-05
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MARIO PIZZA
TABLE OF CONTENTSIncome statement of Mario's Pizza.....................................................................................................................................................3Balance sheet of Mario's Pizza...........................................................................................................................................................8Evaluation of business performance through ratio analysis.............................................................................................................11Limitations of ratio analysis.............................................................................................................................................................11Recommend to Mario.......................................................................................................................................................................12REFERENCES..........................................................................................................................................................................................13
INTRODUCTIONAccounting is the one of the field to which due importance is given in the current time period by the business firms. This isbecause in same accounts are prepared which revealed different business transactions and performance of the business firm. In thecurrent report, income statement and balance sheet is prepared by following specific approach. Ratio analysis tools are used to analyzethe data and making interpretation in respect to the business firm. In depth analysis is done in the report and conclusion is formed onthat basis. Moreover, recommendation is made at end of the report. In this way, entire research work is carried out in the present study.AnalysisIn the current report on analysis of balance sheet that is given in appendix it can be observed that current assets valued at 47995 andcurrent liability valued at 17219. On the basis of difference it can be observed that current assets proportion is much higher thancurrent liability. This happened because firm management is excellent and it is managing its current assets in systematic way. Currentassets are larger multiple times then current liability. It can be said that there is huge amount of liquidity in the firm business.Fundamentals of the firm on this front are very strong and it is able to pay its current liabilities multiple times in its business. It is theproper cash management through which firm successfully recover debt from the debtors and make effective use of cash in thebusiness. All these things lead to generation of sufficient amount of money in the business. It can be said that firm is making effectiveuse of cash in its business and due to fast receipt of cash from the debtors accumulate sufficient amount of current assets in itsbusiness. Thus, its short term financial position is excellent. Total sales of 183737 is made in the business followed by gross profitvalue 116852. Net profit of the firm is 16463 and it can be said that low amount of profit is earned by the firm in the business. It canbe said that expenses in the business are very high. Facts are clearly reflecting that burden of indirect expenses is very high on thebusiness then direct expenses.As per the findings of profitability ratio, it can be seen that Mario Pizza palace’s GP and NP ratios are computed to 63.70%and 8.98% respectively. According to the industrial benchmark for the current year 2014-15, company incur a cost of sales under the
range of 36% to 41% and Mario Pizza’s cost of sales is 36.30% which is under the benchmark and indicates that it is performing welland have effective control over costs. On the other side, under the liquidity performance, current ratio and quick ratio are computed to 2.79:1 and 2.42:1 respectively,both the ratios are above the industrial benchmark of 2:1 and 1:1. Although it is a good indication of sound liquidity position ascompany has enough resources available to pay their suppliers, still, productive use of the resources is necessary. Firm is making bestuse of assets in its business as it is reflected by higher value of the ratio which is 39.63 times. On other hand, inventory turnover ratiovalue is 3.45 times which is very low and on this basis it can be said that firm failed to make best use of inventory in its business. Itcan be said that firm need to make inventory best use in its business. Besides this, Debt to equity ratio is derived to 0.50 which is perfect because target or idle ratio indicates that Mario Pizza mustutilize half proportion of their total capital in the business so as to manage long-term financial risks and solvency position to repaytheir long-term liabilities on time.Limitations of ratio analysisThe analysis does not help to analyse qualitative performance as it only gives quantitative results and also cannot be used forthe forecasting purpose because historical performance can be evaluated from this method. Further, change in accounting policies,rules and reporting also does not reflect by the annual reports may mislead the decisions (Demerits Of Ratio Analysis, 2010.). Apartfrom this, there is no idle ratio available for every ratio, in such case, it becomes too difficult for Mario Pizza to interpret a single ratioCONCLUSIONOn the basis of report it is concluded that there is huge importance of the accounting records for the managers because byusing they access firm performance. There are varied elements of the income statement and balance sheet and by using sameperformance of the firm is accessed by the managers. By using ratio analysis method performance of the firm is measured and
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