Financial Ratio Analysis

INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF PAKISTAN

REPORT ON RATIO ANALYSIS
OF
M/S RANI LIMITED

PREPARED FOR:
Board of Directors

PREPARED BY:
Management Accountant

TABLE OF CONTENTS

Particulars
 Executive Summary
 Introduction

Page No.
3-4
5

 Financial Position and Ratio Analysis

6 - 10

 Suggestions & Conclusion

11 - 12

 Appendices





Horizontal & Vertical Analysis of Income Statement
Comparative Ratios & averages
Trend of Ratios & Percentages
Graphical Representation

13
14
15
16

Page 2 of 16

EXECUTIVE SUMMARY
This report provides an analysis and evaluation of the current and prospective profitability, liquidity and financial stability of Rani Ltd. Methods of Analysis include trend horizontal and vertical analyses as well as ratios such as Current and Quick Ratios. Other calculations include return on Shareholders Equity and Total Assets and earnings per share to name a few. All calculation can be found in the appendices. Results of data analyzed show that the company’s total revenue has increased but Net profit Margin have declined due to increase in cost of sales. Over all liquidity position of Rani Ltd. is satisfactory although quick ratio is at alarming level. Corrective measures are required to avoid any liquidity problems in future.

The Operating cycle is rising due to huge level of inventories, and receivables collection period. Fall in liquidity ratios, rapid increase in revenues, increase in inventory in relation to revenue, uneven increase in receivables and increase in accounts payable period and decrease in profit margin are the symptoms of “Overtrading”.

In line with the decrease in net profit, earning per share has also drastically reduced to Rs.3.22 (2010) from Rs.2.665 (2012) over preceding years.

Page 3 of 16

This report finds the prospects of the company in its current position are not positive. The major areas of weakness require further investigation and remedial investigation. Recommendations discussed include:

 Improving the average collection period for trade debtors  Improving the Inventory turnover
 Avoiding unnecessary overtrading

This report also indicates the fact that the analyses conducted has limitations. Some of the limitations include
 Nature and Type of the company is not known
 Current Economic condition is also unknown
 Data limitations as not enough information is provided or enough detail

Page 4 of 16

INTRODUCTION
This report provides information obtained through ratio analysis, regarding the profitability, liquidity and financial stability of Rani Ltd for the years 2010-2012. This report will pay particular attention to the earning power, liquidity and credit management, inventory management, and will highlight major strengths and weaknesses while offering some explanation for observed changes. The report will comment on the prospects of the company and make recommendations that would improve Rani Ltd’s current performance. These observations do have limitations which will be noted. This report will explain how a cash flow statement and a prospectus could enhance analysis.

Page 5 of 16

Financial Position and Ratio Analysis
Rani Ltd had a very good performance in the past but now some performance indicators show that the present results are deteriorating and not in line with the previous financial indicators of the company.

We understand that the term of reference of the assignment is to analyze the performance and financial position of the company.
We have analyzed the financial position of the company on the basis of information and ratios provided to us on the following grounds: • Profitability of the Company
• Liquidity Position
• Efficiency Indicators
• Investment Perspective

Page 6 of 16

PROFITABILITY OF THE COMPANY
All three profitability ratios given in the table below (see appendices) have positive values during the year, as the company gained...