Detailed Financial Ratio Analysis: Assessing Retailer Health

This report provides a comprehensive financial analysis of a retailer using various financial ratios calculated from their financial statements across three years (2018-2020). The analysis covers profitability ratios such as Gross Profit Ratio, Operating Profit Ratio, and Net Profit Ratio, indicating a decline in profitability over the years. It also examines Return on Capital Employed (ROCE), Interest Coverage Ratio, and Debt to Equity Ratio, highlighting potential financial challenges. Liquidity ratios like Quick Ratio and Current Ratio are assessed, along with efficiency ratios including Inventory Turnover Ratio, Debtor’s Turnover Ratio, and Creditor’s Turnover Ratio. Furthermore, the report evaluates Return on Assets (ROA) and Return on Equity (ROE), revealing insights into the company's asset utilization and shareholder returns. The conclusion suggests that the company needs to improve its asset management and profitability to maintain financial stability and growth.

Part B

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Gross Profit Ratio...................................................................................................................1
Operating Profit Ratio............................................................................................................1
Net Profit Ratio.......................................................................................................................2
Return on Capital employed...................................................................................................2
Interest Coverage Ratio..........................................................................................................2
Debt to Equity Ratio...............................................................................................................3
Quick Ratio.............................................................................................................................3
Current Ratio..........................................................................................................................3
Inventory Turnover ratio........................................................................................................3
Debtor’s turnover ratio...........................................................................................................3
Creditor’s Turnover ratio........................................................................................................4
Return on Assets.....................................................................................................................4
Return on Equity.....................................................................................................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
Books and Journals.................................................................................................................6

INTRODUCTION
The financial statement analysis is the approach of the accounting financial and management, the
purpose of this approach is to determine the importance and meaning of the financial data of the
company through its assets, liabilities, profits etc. This is useful in analysing the company’s
ability to pay its interest and debts (Daryanto, 2020). For the financial analysis the best technique
is to conduct ratio analysis- a tool used by the investors and lenders to make financial decisions.
The present report will outline the calculation different ratios of the retailer using their financial
statements.
MAIN BODY
Gross Profit Ratio
Gross profit Ratio= (Gross profit / Sales)*100
2018 2019 2020
=(22.4/62.5)*100 =(26.1/78.7)*100 =(31.8/95)*100
=35.84% =34.47% =33.47%
Interpretation: It is analysed that company has decline in gross profit which defines company
is losing its monopoly in the retail market. Higher the gross profit higher the company is stable.
In case of this company from in comparison of three years data every year there is decline of
approximately one percent in gross profit.
Operating Profit Ratio
Operating Profit Ratio= (profit before interest and tax / sales revenue)*100
2018 2019 2020
=(10.1/62.5)*100 =(10.1/78.7)*100 =(10.8/95)*100
=16.16% =12.83% =11.36%
Interpretation: From the above table it is analysed that company is earning less profit on its 1
unit of goods in year 2020 as compared to the year the 2018 and 2019. This is showing
company’s incapability to earn profits (Lindström, 2020).
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Net Profit Ratio
Net Profit Ratio= (Net Profit/ sales revenue)*100
2018 2019 2020
=(5.4/62.5)*100 =(5.1/78.7)*100 =(5.7/95)*100
=8.64% =6.48% =6.00%
Interpretation: the company has heavy decrease in the net profit ratio of year 2020 in
comparison to the year 2018 which defines that the company has very low profile in terms of
profitability measures.
Recommendations: after analysing the above three profitability ratio it is clear that company is
stage of decreasing profit measures. Therefore, it is recommended to company to increase the
profitability of operations and efficiency of its management to raise growth prospects.
Return on Capital employed
Return on Capital employed = (EBIT/ Capital Employed)*100
Capital Employed= Total Assets-Current liabilities
2018 2019 2020
=(10.1/(256.6-77.3))*100 =(10.1/(311.9-96.6))*100 =(10.8/(392.8-116.5))*100
=5.63% =4.69% =3.9%
Interpretation: the company has declining ROCE as the year is passing due to the lower profit
generation of the company. This is not favourable situation for the company.
Interest Coverage Ratio
Interest Coverage Ratio= profit before Interest and tax/ interest
2018 2019 2020
=10.1/3.5 =10.1/4.6 =10.8/6.7
=2.88 times =2.19 times =1.61 times
Interpretation: the company has lose it potential of paying the interest same as the previous
year. But as the company ratio is more than one which means company has still chance to
manage its finances and business in order to increase rate of interest paying (Daryanto, 2020).
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Debt to Equity Ratio
Debt to Equity Ratio= Debt/Equity
2018 2019 2020
=104.7/151.9 =137.3/174.6 =175.3/217.6
=0.68 =0.78 =0.80
Quick Ratio
Quick Ratio = (Current assets- inventories)/ Current liabilities
2018 2019 2020
=(42.0-22.4)/77.3 =(48.0-24.6)/96.6 =(61.8-31)/116.5
=0.25 =0.24 =0.26
Current Ratio
Current Ratio= Current Assets / Current liabilities
2018 2019 2020
=42.0/77.3 =48.0/96.6 =61.8/116.5
=0.67 =0.49 =0.53
Inventory Turnover ratio
Inventory Turnover ratio = (Cost of goods sold (COGS))/ Average Inventory
2019 2020
Average inventory= (opening inventory+
closing inventory)/2
=(24.6+22.4)/2= 23.5
Average inventory= (opening inventory+
closing inventory)/2
=(31.0+24.6)/2= 27.8
=52.6/23.5 =63.2/27.8
=2.23 =2.27
Debtor’s turnover ratio
Debtor’s turnover ratio= Net credit sales/ Average account receivables
2019 2020
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Average account receivables = (account
receivables starting of the year+ account
receivables at the yearend)/2
=(17.3+14.3)/2= 15.8
Average account receivables = (account
receivables starting of the year+ account
receivables at the yearend)/2
=(22.9+17.3)/2= 20.1
=78.7/15.8 =95/20.1
=4.98 =4.72
Creditor’s Turnover ratio
Creditor’s Turnover ratio= Cost of Goods sold / Average account payable
2019 2020
Average account payable = (account payable
starting of the year+ account payable at the
yearend)/2
=(56.2+48.5)/2= 52.35
Average account payable = (account payable
starting of the year+ account payable at the
yearend)/2
=(63.3+56.2)/2= 59.75
=52.6/52.35 =63.2/59.75
=1.004 =1.05
Return on Assets
Return on Assets= (profit before tax and interest/ Average total assets)*100
2019 2020
Average total assets = (assets of current year+
assets of previous year)/2
=(311.9+256.6)/2= 284.25
Average total assets = (assets of current year+
assets of previous year)/2
=(392.8+311.9)/2= 352.35
=(10.1/284.25)*100 =(10.8/352.35)*100
=3.55% =3.06%
Interpretation: the company has higher profit in year 2020 compare to the year 2019, but the in
comparison with the assets the company has higher assets and return profit is low this means the
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company is not effectively utilizing its assets therefore return on assets has been lower in year
2020 (Maguni and et. al., 2020).
Return on Equity
Return on Equity= (Profit before tax and interest- preference dividend)/Average Equity
2019 2020
Average total assets = (assets of current year+
assets of previous year)/2
=(174.6+151.9)/2= 163.25
Average total assets = (assets of current year+
assets of previous year)/2
=(217.6+174.6)/2= 196.1
Profit before tax and interest- preference
dividend
=10.1-2.4=7.7
Profit before tax and interest- preference
dividend
=10.8-2.9=7.9
=(7.7/163.25)*100 =(7.9/196.1)*100
=4.7% =4.02%
Interpretation: there are no major changes in the return on equity as company is still capable to
return the equity to its shareholders. But still as here is difference of points therefore company
must take care for its profits in order to maintain the favourable condition (Vibhakar and et. al.,
2020).
CONCLUSION
It is concluded from the above report that for the organisation to analyse their financial
well being. The company must take for the assets and liability in order to earn a good amount of
profits or either to maintain the flow of profits rather than declining. There are different ratio by
which companies can analyse their profits, debts, interest paying capabilities, and much more
and also help them in saving from the financial crisis.
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REFERENCES
Books and Journals
Daryanto, W.M., 2020. Cross Financial Ratio Analysis of Various Indonesian Industry in 2017-
2018.
Daryanto, W.M., 2020. FINANCIAL RATIO ANALYSIS.
Lindström, E., 2020. Financial ratio analysis: handbook for a case company.
Maguni, W and et. al., 2020. Analysis of Financial Ratio on Profitability Level (Return on
Equity) in PT. Bank Muamalat Indonesia TBK. Al-Ulum, 20(1), pp.191-211.
Vibhakar, N.N and et. al., 2020. Identification of significant financial performance indicators for
the Indian construction companies. International Journal of Construction Management,
pp.1-11.
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