Financial Ratio Analysis Report: ABC Ltd. and XYZ Ltd. Case Study

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ASSIGNMENT
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Table of Contents
Introduction.................................................................................................................................................3
PART – A......................................................................................................................................................4
PART –B.......................................................................................................................................................9
PART C.......................................................................................................................................................10
Conclusion.................................................................................................................................................11
References:................................................................................................................................................12
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Introduction
In this report, discuss the beneficial of determination of solvency ratios. The whole report is
divided in to three parts. In part A, Discussion about financial ratios and financial statement
analysis, In Part B, What types of transaction can become the part of Income. Whereas in Part C,
by comparing the balance sheet of ABC ltd and XYZ ltd determine which get higher value of
buying on the basis of their assets and liabilities.
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PART – A
A) Explain and Computation of the following ratios
i) Current
Ratio :
Current
Assets(W.no 1)
Current
Liabilities
Current Ratio for : 2.74074074
the year 2018
Current Ratio for : 2.07619048
the year 2019
Current is being used to determine the company’s ability to pay out its current liabilities within
one year and the ideal ratio would be 2:1
As per the case above it shows that company current ratios for the year 2018 is 2.74 and for the
year 2019 is 2.07. Thus it shows that current company has the ability to pay out its liability
within 1 year.
ii) Quick Ratio : Liquid Assets (W.no 2)
Current Liabilities
Quick Ratio
for : 0.88888889
the year 2018
Quick Ratio
for : 0.83809524
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the year 2019
It shows the company short term liquidity position as to pay out its liabilities within 3 months
with the realization of liquid assets. Thus ideal ratio is 1:1
As per the case, quick ratio for the year 2018 is 0.88 and for the year 2019 is 0.83.Thus it proves
that the company does not have liquid assets to pay its current liabilities within 3 months.
iii) Accounts
Receivable
Turnover: Net Credit Sales
Average Account
Receivables(W.No 3)
Account Receivable
Turnover: 7.101449
for the year 2018
Account Receivables
Turnover: 9.692308
for the year 2019
Days to recover the
Receivables: 365
Accounts receivables
For the year 2018
: 51.39796
For the year 2019 37.65873
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As per the industry standard, company gives 30 days of credit period. But as per the case the
above said company gives 51 days for the period 2018 and 38 days for the period of 2019. Thus,
it can say that company is more liberal to give credit period to their customers.
Inventory Turnover Ratio: Cost of Goods Sold
Average Inventory(W.no 4)
Inventory
Turnover : 1.785714
For the year
2018
Inventory Turnover
: 2.071429
For the year
2019
How many days it takes to turn inventory into sales
It would be : 1 x 365
Inventory turnover
For the year
2018 : 204.4
For the Year
2019 : 176.2069
As per the industry standard most of the company have their inventory turnover ratio is 101 days
but in this company turn their stock into sales would be 204 for the year 2018 and 176 for the
year 2019. Thus it can conclude that company takes more time to convert into sales and it block
their stock as well.
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Working Notes:
1
Current assets of
:
Cash+AccountsReceivables+inventor
y.
Year 2018 : 222000
Year 2019 : 218000
2 Liquid assets : Current Assets-Inventory
Year 2018 : 72000
Year 2019 : 88000
3 Average Account Receivable : Opening account Receivables + Closing Account Receivables
2
For the Year
2018 69000
For the Year
2019 65000
4 Average Inventory : Opening Inventory + Closing Inventory
2
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For the Year
2018 140000
For the Year
2019 140000
b) The above said company has current ratio of 2.74 (2018) and 2.07(2019) which is above the
ideal ratio of 2:1. It can say that company has sufficient amount availability of current assets to
paying out their current liabilities for the year of 1 year. But the company has liquid ratio of
0.88(2018) and 0.83(2019) which is lesser than the 1:1. It can say that company does not able to
meet out its current liabilities within 3 months. It can be concluded that the company have
average short term solvency(Echavarriaet.al. 2019).
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PART –B
The cash inflow would be considered as income of Green Apple Ltd if it received either through
their work or an investment on regular basis (Mao and Wu, 2019).
The Green Apple Lt d has aachieved following five cash inflow while doing the business of
developing an antivirus software.
 Earned $25000000 from the sales proceeds of anti- virus software’s. Thus, it consider as
income as it received on regular basis.
 Earned $3000000 as downloads updates triggered by their client.Thus, it consider as
income as it received on regular basis.
 Get $50000 as an interest on investment. It consider as income as it received through
their investment on regular basis.
 $2000 as discount received on investment. It consider as income as it received through
their investment on regular basis.
 Issued shares of $500000. It would not be consider as in come as it not received from
their work consider as liability of Green Apple Ltd.
Revenue consider as the sales proceeds of Green Apple Ltd for the sales of antivirus
software. The income of $25000000 from sales of anti-virus software and $3000000 as
downloads updates would only be considered as revenue of the Green Apple Ltd (Mao and
Wu , 2019).
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PART C
A) By considering the above said financial statement of ABC. Ltd and PQR Ltd. It shows
that the Current Ratio of ABC Ltd is 0.13 that far below the ideal current ratio of 2:1 and
the current ratio of XYZ ltd is 2.16 which actually meet out the standard of ideality of
2:1. As the banker both the companies apply for the loan of $6000 as a short term loan.
By considering their current ratio, banker concluded that XYZ Ltd has good repaying
capacity of paying short term debts as compare to ABC Ltd(Jenkinsonet.al. 2019).
B) As a business person point of view, Both ABC Ltd and XYZ Ltd are approachable to
sale. Prior to buying, valuation of both the company has been done on the basis of net
asset value method.
Net Asset of ABC Ltd as at June 2020 is 8400 and the Net Asset of XYZ Ltd as at June
2020 is 34200. By considering their net assets, it can be evaluated that higher willing to
pay to XYZ ltd as their net asset is being higher and considered during their
valuation(Jenkinson et.al., 2019).
C) In case, if business owner of ABC Ltd and XYZ Ltd agree to pay their liabilities by their
own then the Acquirer would say that they have to pay higher in case of ABC ltd then
XYZ ltd due to their assets valuation excluding liabilities would be 61200 of ABC ltd and
46200 of XYZ ltd (Jenkinsonet.al. 2019).
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Conclusion
While concluding this report it can be concluded that for determining short term solvency of the
company it can essential to determine their current ratio and quick ratio prior to giving them
borrowing which repayable in short term period.
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References:
 Echavarría-Soto, J.J., Vargas-Herrera, H., Cardozo-Ortiz, P.A., Osorio, D., Mendoza-
Gutiérrez, J.C., Cabrera-Rodríguez, W.A., Cardozo-Alvarado, N., Cely, J., Gamba-
Santamaría, S., Jaulín-Méndez, O.F. and Lizarazo-Cuellar, A.M., 2019. Financial
Stability Report-II Semester 2018. Financial Stability Report-II Semester 2018.
 Jenkinson, T., Landsman, W.R., Rountree, B. and Soonawalla, K., 2019. Private equity
net asset values and future cash flows. Available at SSRN 2636985.
 Mao, C.W. and Wu, W.C., 2019. Does the government-mandated adoption of
international financial reporting standards reduce income tax revenue?.International Tax
and Public Finance, 26(1), pp.145-166.
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