Financial Ratio Analysis of Violet Chan

This assignment analyzes the financial performance of Violet Chan's Consultancy Pty Ltd using various key financial ratios. It calculates and interprets the current ratio, assets turnover ratio, return on assets, debt to equity ratio, debt ratio, and equity ratio. The analysis highlights that the company is in a strong financial position with sufficient liquidity, efficient asset utilization, and a low reliance on debt financing.

Task – 6
Violet Chan's Consultancy Pty Ltd
Ratio Calculation
(a) Current Ratio = Current Assets / Current Liabilities
= 42854/4200
= 10.20
(b) Assets Turnover Ratio = Sales / Average total Assets
= 37812/ ((56654+47850)/2)
= 72.36%
(c) Return on assets = Net Income / Average Total assets
= 5454/ ((56654+47850)/2)
= 10.44%
(d) Debt to Equity Ratio = Debt / Equity
= 4200/52454
= 0.0801
(e) Debt Ratio = Total Liabilities / Total assets
= 4200/56654
= 0.0741
(f) Equity Ratio = Total Equity / Total assets
= 52454/56654
= 0.9259
Analysis of Ratio
Ratios help company in decision making. Therefore, it is very important for a
company to calculate and analyse these ratio. Some of the important ratios are
given below:
1. Current Ratio – It shows the liquidity position for the firm. Liquidity is a
measure of degree to the extent company can meet its short term and
immediate liabilities. Established standard in the market is 2. In the given
case, current ratio is 10.20 which shows company has sufficient liquid assets
to pay off its short term and immediate liability. However, figure of 10.20 also
indicates that company has liquid assets more than its requirement.
Therefore, company must consider investing some of its current assets or
consider paying dividend to shareholders.
2. Assets Turnover ratio – Asset Turnover ratio indicates the efficiency with
which company has used its assets to generate sales. Higher the ratio, better

it is. Higher ratio indicates that company is using its assets with efficiency or
vice versa. In the given case, asset turnover ratio is 72.36%. It means every
$10,000 investment in assets is generating $7,236 of sales.
3. Return on assets – Return on assets ratio indicates the profitability of the
company basis the assets. It shows the profit earned by the company on the
total assets employed. Higher the ratio, better it is. Higher ratio indicates that
assets of the company is being utilized efficiently to earn profit or vice versa.
In the given case, return on assets is 10.44%. It means every $100
investment in assets is generating the profit of $10.44.
4. Debt to Equity Ratio – Debt to equity ratio indicates the proportion of debt
and equity in total capital employed. Ideal ratio is considered 2:1. In the
given case, debt to equity ratio is 0.0801:1. It means there is very less debt
in the company. On one hand, it shows that company is in good position that
it does not need debt to run business. On the other hand, company is not
using the financial leverage to increase the return on equity. Ratio of
0.0801:1 indicate that for every $100 equity, there is debt of $8.01 in the
company. It is a conservative approach adopted by the company.
5. Debt Ratio – Debt ratio indicates the ratio of debt to the total assets. In the
given case, debt ratio is 0.0741:1. This means that debt proportion is very
less in the company. Ratio of 0.0741:1 indicate that for every $100 equity,
there is debt of $7.41 in the company. Again, company is in good position as
it is using very less debt but at the same time missing the opportunity to
increase return on equity by not using financial leverage.
6. Equity Ratio – Equity ratio is just opposite of Debt Ratio. Equity ratio indicates
the ratio of equity to total assets. In the given case, equity ratio is 0.9259. It
means for every $100 investment in assets, there is equity of $92.59.
Overall, all the ratios shows that company is in very good financial position and it is
not dependent on debt to run its business.