Comprehensive Financial Ratio Analysis Report for Sunbay Sales

This report presents a financial ratio analysis of Sunbay Sales, evaluating its performance based on data from the year ended June 30, 2017. The analysis encompasses profitability ratios (return on equity and profit margin), liquidity ratios (current ratio and cash flow ratio), efficiency ratios (asset turnover and days debtors), and capital structure ratios (debt to equity and debt ratio). The report highlights Sunbay Sales' strong profitability but identifies areas for improvement in liquidity, specifically the need to optimize current asset utilization. The analysis provides insights into the company's financial health and offers recommendations for future financial management. The report also acknowledges the limitations of ratio analysis, such as the influence of accounting policies and inflation.

Contents
Executive Summary.....................................................................................................................................2
Evaluation and comparison of ratios...........................................................................................................3
Profitability Ratios...................................................................................................................................3
(a) Return on equity ratio..............................................................................................................3
(b) Profit margin ratio...................................................................................................................3
Liquidity Ratios........................................................................................................................................3
(a) Current ratio............................................................................................................................3
(b) Cash flow ratio.........................................................................................................................3
Efficiency Ratios.......................................................................................................................................4
(a) Assets turnover ratio...............................................................................................................4
(b) Days debtors............................................................................................................................4
Capital Structure......................................................................................................................................4
(a) Debt to equity ratio.................................................................................................................4
(b) Debt ratio.................................................................................................................................4
Limitation of Ratio Analysis.........................................................................................................................4
Conclusion...................................................................................................................................................4
References...................................................................................................................................................5

Executive Summary
This report is prepared for Karin Milson, on the financial health of Sunbay Sales. This report discusses
the various financial aspects including the profitability, liquidity, efficiency and capital structure. This
report is based on the data for the year ended 30 June, 2017.

Evaluation and comparison of ratios
Ratios play an important role in interpreting the financial position and health of the business. These ratios
are mainly used by the management and stakeholders to analyses the business health and taking further
decisions. The main financial ratios are:
(a) Profitability Ratio
(b) Liquidity Ratio
(c) Efficiency Ratio
(d) Capital structure
Now, lets discuss these ratios in detail:
Profitability Ratios
Profitability ratios are the financial ratios used to access, calculate and compare the profit earning
capability of the company. It includes comparing profits of the business, with expenses and other costs.
The two such types of ratios are ("Profitability Ratios - Calculate Margin, Profits, Return on Equity
(ROE)", 2018):
(a) Return on equity ratio – This ratio shows the return received by shareholders on their amount
invested. This ratio is calculated by dividing profit with equity. This ratio shows the return
provided by the company to its shareholders. In the given case, the company has a ROE of
16.35%, which means that for every $100 invested by shareholders in the company, they are
getting a return of $16.35.
(b) Profit margin ratio – This ratio shows the profit earned as a percentage of sales. In the given
case, the company is having a profit margin of 30.80% which means that against a sale of $100
the company is making a profit of $30.80.
Liquidity Ratios
These categories of ratios evaluate the liquidity performance of the company. This ratio measures the
company’s ability to pay off its liabilities and debt obligations from the available resources. The two such
types of ratios are (Course, 2018):
(a) Current ratio – Current ratio is current assets divided by current liabilities. This ratio measures
the company’s efficiency to pay off its current liabilities from its current assets. In the given case,
the company has a current ratio of 6.13 times. It means that the company’s current assets are 6
times of its current liabilities and shows that the company is not utilizing its current assets means
resources efficiently as a company’s ideal current ratio should be 2:1.

(b) Cash flow ratio – This ratio compares the cash flow from operations with its current liabilities.
In the given situation, the company has a cash flow ratio of 0.16 times. It means the company’s
cash flow from operations is very low as compared to its current liabilities, meaning thereby the
cash generated from operations is not sufficient to pay off its current liabilities.
Efficiency Ratios
Efficiency ratios measure the operating efficiency of the company. It means how efficiently a company is
utilizing its assets and liabilities. The two such type of ratios is (Staff, 2018):
(a) Assets turnover ratio – This shows the company’s ability to generate sales from its assets. In
the given case, the company’s assets turnover ratio is 0.40 times which means that by investing
$100 in assets the company can generate $40 from it as a sale.
(b) Days debtors – This ratio shows the company’s ability to convert its sales into cash or in other
words shows the collection days of sales. This ratio is 74.12 days in given case which means that
the company can collect cash from its sales in 74 days.
Capital Structure
These ratios emphasis and evaluate on the portion of debt and equity in the company and are dedicated to
the capital structure of the business. The two such types of ratios are
(a) Debt to equity ratio – It is a very important ratio and shows the debt and equity component in
the company. It is calculated by dividing debt with equity. In the given case, it is 21.57% which
means the company’s debt are 21.57% of its equity.
(b) Debt ratio – This ratio compares the debt of the company with its total assets or in other words
the debt portion divided by total assets. In the given case, it is 16.09%, which means the debts are
16.09% of the total assets of the company.
Limitation of Ratio Analysis
The ratio analysis is useful however, it has some limitations, and some of them are (Bragg, 2018):
(a) Ignorance of inflation effect or market price
(b) Different accounting policies for different companies, hence non comparability of ratios amongst
companies.
(c) Different interpretations and views of comparability of ratios

Conclusion
On the basis of above ratio analysis, we conclude that the company has a good financial position and is a
good profitable company, however, the liquidity aspect needs to be improved, as it is seen that the
company is not utilizing its assets effectively. So, the company needs to improve its current ratio.

References
Bragg, S. (2018). The limitations of ratio analysis. AccountingTools. Retrieved from
https://www.accountingtools.com/articles/what-are-the-limitations-of-ratio-analysis.html
Staff, I. (2018). Efficiency Ratio. Investopedia. Retrieved from
https://www.investopedia.com/terms/e/efficiencyratio.asp
Profitability Ratios - Calculate Margin, Profits, Return on Equity (ROE). (2018). Corporate Finance
Institute. Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/
profitability-ratios/
Course, M. (2018). Liquidity Ratios | Example | My Accounting Course. My Accounting Course. Retrieved
from https://www.myaccountingcourse.com/financial-ratios/liquidity-ratios