Financial Ratio Analysis of XYZ Proprietary Limited Assessment Answer

Introduction

Financial statement analysis is regarded as the procedure of evaluating the financial statements of the company for decision-making. Stakeholders make use of it to build an understanding of the overall health of the company and to assess the business's worth and its financial position and performance (Palepu et al., 2020). In this assessment, the financial performance and position of XYZ Proprietary Limited will be analysed with the help of ratio analysis.

Financial Ratios Interpretation

1. Return on Assets (ROA) – It is regarded as the profitability metric that offers how much profit; the corporation can produce from its assets (Almira & Wiagustini, 2020). It is calculated as 59% for 2020 which signifies that XYZ Proprietary Limited is producing significant returns by effectively and efficiently using economic resources. This positive ROA indicates an upwards profit trend also.
2. Assets Turnover – This ratio computes the efficiency of how well the company make use of assets to produce sales. The asset turnover ratio is computed as 9 which shows that the value of the assets used is lower as compared to the income produced from them. The ratio of 9 indicates that each dollar of asset produces $9 of sales revenue. This speaks for a higher level of efficiency. XYZ Proprietary Limited thus uses its assets in an efficient way to produce higher profitability.  

• Days inventory ratio – This efficiency ratio depicts the average number of days that the corporation takes to trade its inventory. It is the metric majorly used by analysts to recognize the efficiency of sales. The inventory days for XYZ Proprietary Limited are calculated as 37 days which is lower. This indicates that the company takes a shorter duration to clear off the inventory. On the other hand, higher inventory days may indicate that the company is not adequately managing the inventory.

1. Days debtors’ ratio – This efficiency ratio signifies how quickly it is taking the company’s debtors to pay the outstanding amount. This ratio is used to depict the average number of days it takes the corporation to acquire payment from the customers for the invoices being issued to them (Kaur & Kalotra, 2019). The debtor days ratio is calculated as 14 days which is quite lower. This lower debtor days ratio is considered as favourable as it signifies that XYZ Proprietary Limited can gather the cash earlier from consumers and accounts receivables are good which means that the company is not required to write them off as bad debts.
2. Inventory turnover – The inventory turnover proportion depicts the degree at which the inventory stock is sold, used or traded. It is calculated as 10 which is quite high. This higher inventory turnover ratio shows stronger sales and lower costs of holding the inventory. The ratio of 10 means that the corporation has sold off its entire inventory 10 times in the specified period. XYZ Proprietary Limited is efficient in selling its inventory at a higher rate and that is effectively managing its inventory.
3. Debtors’ turnover – It is an efficiency ratio that shows the number of times, the average debtors have been converted into cash during the term. It is computed as 25 times which shows that the company has converted debtors into cash 25 times. The higher debtors’ turnover ratio signifies that the collection procedure of the company is effective. With that, customers are making payments on time and the company is good at collecting the amount from debtors.

• Current Ratio (CR) – Current ratio is a liquidity ratio that shows the association between current possessions and present liabilities (Husna & Satria, 2019). It is computed as 1.38 for XYZ Proprietary Limited which indicates that the company can pay off the current liabilities 1.38 times over. The current ratio of 1.38 specifies that the corporation has $1.38 of current economic resources for every $1 of short-term financial obligations.
• Quick Ratio (QR) – The quick ratio computes the ability of the company to rapidly adapt liquid assets into cash to pay off the short-term liabilities. The quick ratio of 0.68 signifies that the corporation would not capable to survive emergencies and other events that may lead to temporary cash flow issues. The company has lower quick assets, as they are not enough to pay off the current liabilities.

1. Debt to Equity Ratio (DE) – This ratio signifies how much debt the corporation has in comparison to the shareholder's equity (Rahayu et al., 2021). Here, XYZ Proprietary Limited has a negative 5 as its debt-to-equity ratio. This signifies that the company has negative shareholder equity and its liabilities surpass the assets. This company would be termed as extremely risky
2. Gross Profit Margin (GPM) – This is a profitability ratio that tells how much the business has made after making payment for the direct cost of doing the business including the materials, labour and other direct cost of production (Evmenchik et al., 2021). The ratio is computed as 39% which signifies that for each dollar of sales revenue produced, $0.39 is reserved while $0.61 is attributed to the cost of goods sold. The retained amount is then castoff to pay-off the administrative and general expenses, debts, rent, overheads, interest expenses, etc.

Conclusion

It can be concluded that XYZ Proprietary Limited has performed well in 2020 in terms of liquidity, profitability and efficiency. The gross profit ratio of 39% signifies that company is capable of covering the cost of goods sold. A higher return on assets ratio shows that the corporation's management is effective in generating higher profits from using the assets. The current ratio is greater than 1 signifying that it can easily pay off short-term debts with help of current assets. Lower debtors’ days and lower inventory days signify that company is efficient in converting the inventory into cash.

References

Almira, N. P. A. K., & Wiagustini, N. L. P. (2020). Return on asset, return on equity, dan earning per share berpengaruh terhadap return saham (Doctoral dissertation, Udayana University).

Evmenchik, O. S., Niyazbekova, S. U., Seidakhmetova, F. S., & Mezentceva, T. M. (2021). The role of gross profit and margin contribution in decision making. In Socio-economic Systems: Paradigms for the Future (pp. 1393-1404). Cham: Springer International Publishing.

Husna, A., & Satria, I. (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), 50-54.

Kaur, R., & Kalotra, A. (2019). To analyze relationship between working capital management and profitability. International Journal of Management, Technology and Engineering. To analyze the relationship between working capital management and profitability.

Palepu, K. G., Healy, P. M., Wright, S., Bradbury, M., & Coulton, J. (2020). Business analysis and valuation: Using financial statements. Cengage AU.

Rahayu, H. C., Lestari, E. P., & Kuniawati, T. R. (2021). The Effect of Book Value, Debt to Equity Ratio, Roa, Interest Rate and Exchange Rate at Jakarta Islamic Index (JII). El-Qish: Journal of Islamic Economics, 1(1), 25-40.

Appendix

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