Comparative Analysis: Business Performance of R plc vs. S plc

This report assesses the business performance of R plc through financial ratio analysis, comparing it with S plc in the same industry. It covers liquidity ratios (current and quick), profitability ratios (gross and operating profit margins), capital structure ratios (return on capital employed, debt-equity rati...Read More

BUSINESS PERFORMANCE

Contents
INTRODUCTION.....................................................................................................................................3
BODY.....................................................................................................................................................3
CONCLUSION.........................................................................................................................................5
REFERENCES..........................................................................................................................................6

INTRODUCTION
Business performance refers to the ability of the business to use the resources with maximum
efficacy which would help the business grow and reduce its costs. A business is started with
the sole motive of earning profits. Profits are not just earned quantitatively but qualitatively
as well. Making the best use of the resources and managing the business activities efficiently
makes the business more profitable in the long run (Drummond, 2018). Business managers
have to ascertain time-to-time the amount of efficiency the business is earning. Business can
either compare the working by its own historical data or by comparing it with another firm
working in the industry. This report revolves around the business performance of a case
company R plc. The report highlights the ratio analysis of R plc and a brief comparison of the
same with another company working in the same industry, S plc.
BODY
Financial Ratio Analysis is a tool used in accounting which helps managers analyze the
financial data and take necessary steps for the management of the business. It is a relative
magnitude of two or more accounting values present in the financial statements of the
company (ElBannan, 2021). Financial ratios comparison is either done by comparing the
ratios of two different period of the same company or by comparing the ratios of two
different companies working in the same industry. Following are the calculations of the
different ratios of R plc followed by comparison with another company working in the same
industry, S plc.
Liquidity Ratio: This ratio tells the company’s ability to pay its short-term debt. In simple
terms, this ratio gives an insight as to how quickly the company can pay off its liabilities by
using the current assets. Following are the two types or liquidity ratios calculated.
Current ratio = Current assets / current liabilities
= 15089 / 9466
= 1.59
Quick ratio = (current assets – inventory) / current liabilities
= ( 15089 – 6893 ) / 9466
= 8196 / 9466
= 0.86
Analysis: By comparing the ratios of R plc with S plc, it is noticed that both the
companies have near to liquidity ratios. S plc have higher liquidity ratios means that
the company is doing better than the case company. Ideal current ratio is considered
as 2:1 and 1:1 as quick ratio. S plc has approves with the ideal data but R plc does not
meet the ideal liquidity ratios. This means R plc might face some issues in future if
the managers does not work effectively to maintain the liquidity ratio.
Profitability Ratio: This tells how profitable the business is. In wider terms it measures the
company’s ability to generate earnings taking in account its revenue and costs (Bhatt, and
Bhatt, 2017). Following are the calculation of different profitability ratios.

Gross profit margin = Gross profit / net sales * 100
= (10,880 / 26245) * 100
= 0.414 * 100 = 41.4 %
Operating Profit margin = operating profit / net sales * 100
= 5313 / 26245 * 100
= 0.202 * 100 = 20.2 %
Analysis: By comparing the ratios of both the companies, it can be said that R plc is
doing better. The ability of R plc to make profit is better than S plc as both the profitability
ratios of the business have greater rate than that of S plc.
Capital structure related ratios: These are solvency ratios which refers to the measure of a
business’s ability to cater its long-term debt obligations. It takes into account the business
lenders and indicates the company’s cashflows are sufficient to meet these obligations or not
(Desiyanti, and et.al., 2019). Following are the calculation of R plc followed by analysis.
Return on capital employed = Earnings before interest and tax / ( total assets – total current
liabilities )
= 5313 / ( 26806 – 9466 )
= 5313 / 17340 * 100 = 30%
Debt-equity ratio = Total liabilities / equity
= 12266 / 14540 * 100 = 84%
Interest coverage ratio = Earnings before interest, tax, depreciation and amortization /
interest payment
= 5313 / 980 = 5.42x
Analysis: Company R is doing great in respect to capital structure and solvency as the
company has all the three ratios greater than the S plc. R plc can meet its long term payment
obligations with more ease than company S plc.
Stock market performance ratios: These ratios basically evaluates the current market value of
the shares of a company and how well the company is actually doing in relation to its stock
(Lychev and Rozhnov, 2017). In this the main focus is on the benefits that are driven by the
shareholders for having their money invested in the business. Following are the ratios
calculations of same:
Earnings per share = net earnings / shares outstanding
= 3033 / 20000 = 0.15p
Price earnings ratio = share price / earnings per share
= 1.60 / 0.15 = 10.6x
Dividend coverage ratio = profits after tax / dividends

= 3033 / 1380 = 2.19x
Analysis: The above calculations shows the stock market performance of R plc. The
company is performing kind of similarly in the stock market. S ltd have greater Earnings per
share but that made its price earning ratio less than the R plc. The price earnings ratios shows
the stock market performance and R plc has 10.6x which is greater than that of S plc. Hence
it can be said that in comparison, R plc is doing better.
Assumption Made: The main assumption made in the above calculations is that there are
different formulae and ways of calculating the ratios. The report has followed the basic
calculation formulae, but the analysis might not be valid if the ratios provided in the case of S
plc are calculated using different formulae.
CONCLUSION
From the above-mentioned report, it can be concluded that ratio analysis is a necessary tool to
determine a company’s performance. The report highlights the use of different types of ratios
in relation to R plc and follows with a brief analysis of these by comparing them to those of S
plc provided in the case.

REFERENCES
Drummond, C.K., 2018. 2. Financial Statements. In Financial Decision-Making for
Engineers (pp. 21-72). Yale University Press.
ElBannan, M.A., 2021. On the prediction of financial distress in emerging markets: What
matters more? Empirical evidence from Arab spring countries. Emerging Markets
Review. 47. p.100806.
Bhatt, P.R. and Bhatt, R.R., 2017. Corporate governance and firm performance in
Malaysia. Corporate Governance: The international journal of business in society.
Lychev, A.V. and Rozhnov, A.V., 2017, September. Advanced analytics software for
performance analysis and visualization of financial institutions. In 2017 IEEE 11th
International Conference on Application of Information and Communication Technologies
(AICT) (pp. 1-5). IEEE.
Desiyanti, O., and et.al., 2019. The Effect Of Financial Ratios To Financial Distress Using
Altman Z-Score Method In Real Estate Companies Listed In Indonesia Stock Exchange
Period 2014-2018. Business and Entrepreneurial Review. 19(2). pp.119-136.