Financial Ratio Calculations

Topics: Financial ratios, Generally Accepted Accounting Principles, Balance sheet Pages: 9 (2548 words) Published: July 26, 2012

Terms of Reference
1. To determine whether Ted Baker is worth investing into 2. To compare financial ratios over the last five years
3. To identify problem areas and good signs for investment I will then come to a clear conclusion about Ted Baker’s financial performance and make an informed recommendation to a potential shareholder. INTRODUCTION

The report was requested by a potential shareholder,
Will be analyzing the liquidity and efficiency ratio (short term solvency), because it is important for the potential shareholder to know the ability of Ted Baker to meet its short term financial commitments and how it utilizes its recourses. My ratio comparisons will be covering the last five years from 2011 to 2007. I will be using figures from the Ted Baker group Income statements and balance sheets. Five year analysis of Liquidity and Efficiency Ratio (Short Term Solvency) Liquidity ratios are a measure of the ability of a company to pay off its short term financial obligations in case of any difficulty. It seeks to avoid financial miss harp.

To find out if a company’s short term assets are readily available to pay off its short term debts. This determines the company’s current assets and how quickly they can be converted into cash to meet current liabilities. The current ratio is used to test the company’s liquidity by using current assets available to cover current liabilities. I will be analyzing four liquidity ratios; the current ratio, quick ratio also known as acid test, fixed turnover ratio and total asset turnover ratio. Each of the above mentioned ratios includes current assets in the calculations (see appendix 1 Company Performance ratios) because they are easily converted into cash. LIQUIDITY CURRENT RATIOS

To give an insight of the proportion of Ted Baker’s assets available to cover current liabilities and still be able to carry on with its operations. The greater the coverage of liquid assets to short term liabilities, the more likely it is that a business will be able to pay debts as they become due while still funding ongoing business operations. How

This measures current assets as a proportion of current liabilities. By selling assets that can be sold for cash in order for the company to be able to pay its debts. It is always better to have a high current ratio between 1.5 and 2. Looking at Ted Baker’s current ratios in the table below, for the last five years (from 2007 to 2011), the ratios have been around 2.25. (for every £1 of current liabilities, the business has £2.25 of current assets available) This means that the company’s current assets can cover its current liabilities. The ratio however is slightly above 2 because a high proportion of assets for Ted baker are stock (See appendix 2 Balance sheet ‘Inventories’). 2011| 2010| 2009| 2008| 2007|

2.23| 2.35| 1.93| 2.24| 2.39|

Just looking at the current ratios not enough to show the company’s liquidity, it is not …. On its own for a would be shareholder, as a company would only need to liquidate its all its assets to meet liabilities is when it is closing down. The potential shareholder wants to invest into a company that has continuity. That is why I will go on to analyse other liquidity ratios.

2QUICK RATIO (Acid Ratio)
Is a liquidity indicator that goes further to refine the company’s short term efficiency. By measuring the company’s most liquid assets which can cover current liabilities. This works as an alternative to the above current ratio. To get a clear picture of the company’s most liquid current assets, inventories are removed from the equation because they are more difficult to convert into cash quickly. The higher the rate, the more liquid. Ted Baker’s ratios shown in the table below have been about 1.1, which indicates that quick current assets exceed current liabilities. 2011| 2010| 2009| 2008| 2007|...
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