Accounting Theory and Current Issues Assignment: Financial Analysis

This report presents a financial analysis of Capilano Honey Limited, employing various financial ratios to assess the company's performance. The analysis includes the calculation and interpretation of key ratios such as Net Profit Margin, Return on Equity (ROE), Return on Assets (ROA), Return on Invested Capital (ROIC), Depreciation/PP&E ratio, Current Ratio, and Quick Ratio. The report provides insights into the company's profitability, efficiency, and liquidity, offering a comprehensive overview of its financial health. The report also defines each ratio and the significance of the calculated values. The report provides a detailed analysis of the company's performance based on the calculated ratios.

ACCOUNTING THEORY
& CURRENT ISSUES
ASSIGNMENT

1
By student name
Professor
University
Date: 20 May 2018.
1 | P a g e

2
Executive Summary
In this assignment the financial statements of two entities have been taken into consideration and then
important ratios are calculated to comment whether the companies are performing good or not, post
that the overall analysis has been provided for the reference. Financial analysis provides an insight to
the users of the financial statements on how the companies are performing well and what are the areas
in which some changes are required. It also helps in comparison between the peers and helps the
investors in taking correct decisions regarding the company. Ratio analysis has a lot of advantages which
can be seen below, it helps in analysing whether the company is acting to the best of their ability or not
and is delivering best results that it should base on its income statement and balance sheet. In case
there are major any issues with the performance of the management same can be judged with the help
of these ratios.
2 | P a g e

3
CONTENTS:
Introduction...........…………………………………………………………………..........…...4
Analysis.......................………………........................................................................................5
Conclusion.......................………………...................................................................................10
References......................……………….....................................................................................11
3 | P a g e

4
Introduction
In this assignment two companies have been selected who are peers to one another and ration
analysis of those companies have been done, to reach a feasible solution. The data has been extracted
from their balance sheet and all-important ratios related to liquidity, profitability, earnings has been
calculated and possible results have been stated. Ratio analysis is an important tool for financial
statement analysis it helps in finding how the company is performing, by comparing the company with
that of the industry standard and thus that helps in finding ways in which the company can change its
situation. Ratios can be calculated analysed and interpreted. It is very important that good knowledge of
the financials should be there. In case there are any issues and risk ratio analysis helps in finding the
same and providing the company with the solution they deserve (Farmer, 2018). It helps in comparison
between two companies and thus investors can decide which company is better and where they should
put in their money for better results. All the important ratios have been defined below and important
calculation have been shown with effective interpretation. The main need of calculating ratios is to see
which company is performing better and in what ways the company can improve. It is very important
that timely updates must be there else the company would become Rundu ant and non-functional.
There are various ways of analysing the ratios and financial experts can do that easily. Thus, people sort
to compare with their peers based on these ratios so that they can make decisions based on factual data
rather than on vague perceptions which might not be always correct. The same has been done and
analysed below.
4 | P a g e

5
Analysis
Capilano Honey Limited: The financial of the company have been take and analysed and important
calculations have been calculated from that. The various ratios are based on different prospect that
include finances, profitability, liquidity, overall earning etc. Each ratio has been explained, calculated and
briefed below for the organization.
Calculation of various ratio of the Capilano Honey Limited
1. Net Profit margin ratio = Net Reportable Profit/ Net sales * 100
= 10334810 / 135217246 * 100
=0.076 * 100
= 7.6%
2. Return on equity (ROE) : - = Net income / Equity share
= 10334810 / 9457481
= 1.09
3. Return on Assets (ROA) = Net Income/ Total Assets * 100
= 10334810 / 96348883 * 100
= 0.1072* 100
= 10.72%
4. Return on invested capital (ROIC) = Net income – dividend / Total capital * 100
= 10334810 – 3782992 / 62331965 * 100
= 0.1051* 100
= 10.51%
5. Depreciation / PP&E (Property plant & equipment) Ratio = Depreciation / PP&E (Property plant
& equipment) * 100
5 | P a g e

6
= 1598976 / 21236371* 100
= 0.075* 100
= 7.5 %
6. Current ratio = Current Assets / Current liability
= 69837666 / 26619405
= 2.62
7. Quick ratio ;-
= Total Current Assets – Prepaid expenses – inventory / Total Current liabilities – Bank overdraft -
Provisions
= 69837666 – 199896 – 44152632 / 26619405 - 3783238
= 25485138 / 22836167
= 1.11
Analysis of the above calculated ratio
1. Net profit margin ratio ;- Net profit margin ratio, In which ratio is calculated on the basis of net
profit to revenue for the company or any business segment of the company, Basically this ratios
calculate to express to know the how much net profit is eared by the company over the net sales of the
company in a percentage term. That means how much revenue of the company translates into profit
(Dichev, 2017). Net profit is the total amount of income that the company has earned over his expenses
and hence it is an important aspect that companies needs to analyse feasibly and reach a conclusion. It
is one of the most important profitability ratios.
6 | P a g e

7
Net profit margin is one of the most important ratios that company can analyse. This ratio plays very
important part of any other financial measure of the company. It is important to understand this Ratio
provide the earnings of company over the sales. It is calculated using income statement of company.
Further Net profit margin ratio generally include non-cash item of the income statement of the
company, this ratio does not include the non-cash item like depreciation. It very important to
understand that change in accounting method plays the very important role to calculate the net profit
margin ratio of the company.
Further This ratio shows that if net profit margin ratio is low that means it create the various issue of the
company like inadequacy of management, inadequacy of customer and inadequacy of expenses. Net
profit margin Low means company has unfavourable accounting method. Some company want to save
the tax than such company should intentionally reduce his profit margin ratio. This ratio varies between
companies and varies with industries also. i.e. High or low net profit margin ratio is compare between
the companies in the similar industries (Kangarluie & Aalizadeh, 2017).
In Present case company Capilano Honey Limited is having 7.6% net margin ratio that means company
is earning 7.6% over the net sales of current financial year. This is generally very low ratio of profit
earned.
2. Return on equity (ROE);- Return on equity means how much share holder can earn by investing
their fund into equity share of the company. Return on equity ratio shows the return on equity of the
company. It is one of the most important earnings ratio that the company can follow to see how is it
performing and delivering.
Investors generally prefer to invest in the company which have higher Return on equity (ROE). However
Return on equity ratio is as a benchmark to compare the company between the similar companies of the
industry. As company’s Profit and income varies into different levels significantly within the same sector
of company. Return on equity will also vary into different levels of company, if company Plan to give the
dividends rather than to keep the fund ideal, it result to increase the Return on equity of the company.
Basically ROE will depend on dividend of the company if company provide the dividend that means
company will earn higher ROE (Kuhn & Morris, 2016).
7 | P a g e

8
In the present case Capilano Honey Limited having ROE is 1.09 that means that for every 1 rupee of
investment in Capilano Honey Limited, investors would generate Rs 1.09 In 1 stock , this return reflect
the high value return of the Capilano Honey Limited . It means that Capilano Honey Limited was newly
started company and the company is in growing stage (Kangarluie & Aalizadeh, 2017).
3. Return on Assets (ROA):- Return on Assets means that company earn on their total Assets. It is
calculated net income divided by total assets of the company, where Net income is derived from the
income statement of the company and we consider profit after taxes for calculation. Where assets
include cash and cash-equivalent items such as receivables, inventories, land, capital equipment as
depreciated, and the value of intellectual property such as patents etc. Further company have the
"good will" which means extra money paid by the company as per the correct value derived at the time
of valuation of goodwill. Since the Value of asset will increase and decrease over the period i.e. An
average of assets should be used over the period is consider for calculation of ROA.
In the present scenario company Capilano Honey Limited is having return on assets is 10.72% that
means company can earn only 10.72% of their profit by utilising their resources. Basically, ROA is
calculated by the company to compare the result between the similar companies and also to know the
use of assets of the company. Company can do the cost benefit analysis i.e. company can analysis
whether the existing assets are providing such economic benefit over its cost or not. It is a one of the
important profitability ratio of the company (Heminway, 2017).
4. Return on invested capital (ROIC); - Return on invested capital means how much return
company can earn by investing their capital ROIC is the percentage amount that company is earning by
investing on such project. It is also termed as weighted average cost of capital return of the invested
capital in the company. However, the ROIC is measured by the monetary value needed, instead of assets
that were purchased. Therefore, we called Return on invested capital is consider the long-term debt and
preference share i.e. equity share (Goldmann, 2016).
In the present scenario company Capilano Honey Limited is earning 10.51% over their invested capital
that means. Company can manage the good return. Managing the good ROIC is more attractive to the
potential customer.
8 | P a g e

9
5. Depreciation / PP&E (Property plant & equipment) Ratio: - Depreciation and plant property and
equipment is calculated to Know that how much depreciation is charged on the plan property of the
company. Property plant and equipment are recorded at cost and depreciated over their estimated
useful life of the assets. Depreciation is calculated by applying straight line method or Written down
value method of the depreciable assets. Further treatment of Property plant and treatment is done as
the manner prescribe by the international financial reporting standard (IFRS) or Generally accepted
accounting standard.
In the present case Depreciation / PP&E (Property plant & equipment) Ratio of the company Capilano
Honey Limited is 7.5% that means company can charge depreciation on their assets @ 7.5%. it reflects
company’s assets are in good condition (Sithole, et al., 2017).
6. Current ratio; - Current ratio of the company is a liquidity ratio, it reflect that company is able to
pay their short term liability . The current ratio of the company mainly gives the idea of companies’
ability that company is sufficient to meet their Short-term obligation or not. As current ratio is
calculating to know the rough idea about company’s current financial position. i.e. company’s working
capital. The current ratios show the efficiency of a company's operating cycle. Further Current ratios
provide the idea that how fast the company can arrange the liquid cash to manage the day to day
expenses. The current ratio is one of the major important financial ratios of the company which is help
to investor to select the better company to invest. It is helpful to access the company risk factor also.
Further higher the current ratio means company is more able to pay off their debt, their obligation at
the earliest.
If current ratio is higher that means company have sufficient working capital that means company
manage their day to day operation very well.
In the Present case Capilano Honey Limited having current ratio of 2.62 that means Capilano Honey
Limited is able to pay off their short term and long term obligation very well, it is a good indicator for
9 | P a g e

10
company. As per industry, standard current ratio is 2: 1 that means company have their current assets
twice of their current liability. In present case Capilano Honey Limited current ratio is 2.62 that mean
Capilano Honey Limited able to pay off their obligation.
7. Quick Ratio; - Quick ratio means company how quickly company is able liquidated their fund i.e.
at what time company can convert their current ratio into cash that is called quick ratio. For the
calculation of quick ratio, we deduct inventory or prepaid expenses from the total current assets. We
deduct inventory because inventory of the company is not easily convertible into cash it will take some
time to realise into cash. Prepaid expense is not considered because prepaid expenses are already paid
for certain obligation of the company; hence it is not realising into cash. Further in total current liability
we do not consider the bank overdraft and provisions because time of payment of bank overdraft is
already decided or provision are made against certain assets that means it is not immediately payable,
hence it is not considered for calculation of quick ratio (Chron, 2017).
In the present case Capilano Honey Limited quick ratio is 1.11 that means company is sufficient cash in
hand to pay off their immediate obligation. Quick ratio 1.11 reflects that company is in a good condition.
Treasury Wine Estates Limited
Calculation of various ratio of the Treasury Wine Estates Limited
1. Net Profit margin ratio = Net profit after tax/ Net sales * 100
= 269900000 / 2571300000 * 100
=0.1049 * 100
10 | P a g e

11
= 10.49%
2. Return on equity (ROE) : - = Net income / Shareholder’s Equity
= 269900000 / 736766000
= .3636
= 36.6 %
3. Return on Assets (ROA) = Net Income/ total Assets * 100
= 269900000 / 5279300000 * 100
= 0.051* 100
= 5.1%
4. Return on invested capital (ROIC) = Net income – dividend / Total capital * 100
= 269900000 – 184600000 / 3608500000 * 100
= 0.024* 100
= 2.4%
5. Depreciation / PP&E (Property plant & equipment) Ratio = Depreciation / PP&E (Property plant
& equipment) * 100
= 99400000 / 1328500000 * 100
= 0.075* 100
= 7.5 %
6. Current ratio = Current Assets / Current liability
= 1835200000 / 779300000
= 2.35
7. Quick ratio ;-
11 | P a g e