Ratio Analysis Financial Accounting

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Financial Accounting and Reporting – Ratio Analysis

The following five-year summary relates to VKM Ltd, and is based on financial statements prepared under the historical cost convention.

Financial Ratios20062005200420032002
Profitability
MarginTrading Profit
Revenue%7.87.57.07.27.3
Return on AssetsTrading Profit
Net Operating Assets%16.317.616.218.218.3
Interest & Dividend Cover
Interest coverTrading Profit
Net Finance Chargestimes2.94.85.16.53.6
Dividend coverEarnings Per Share
Dividend Per Sharetimes2.72.62.12.53.1
Debt to Equity Ratios
Net Borrowings
Shareholders’ funds%65.961.348.310.836.5
Liquidity Ratios
Quick ratioCurrent Assets less inventory
Current Liabilities%74.373.378.8113.893.4
Current ratioCurrent Assets
Current Liabilities%133.6130.3142.2178.9174.7
Assets Ratios
Operating asset turnoverRevenue
Net Operating Assetstimes2.12.42.32.52.5
Working capital turnoverRevenue
Working Capitaltimes8.68.07.07.46.2
Per Share
Earnings
cents15.6513.6010.9811.3212.18
Dividends
cents5.905.404.904.604.10
Net assets
cents102.1089.2285.9585.7978.11

Net operating assets include tangible non-current assets, inventory, receivables and payables. They exclude borrowings, taxation and dividends.

Required:

a)Prepare a report on the company, clearly interpreting and evaluating the information given. (50%) b)Discuss the uses and limitations of ratio analysis in the context of historical cost accounting and fair value accounting. (50%

Table of Contents

Part A

Summary
Analysis and Report:

1.0General Trends Of Single Ratios
1.1Profitability
1.2Liquidity
1.3Debt To Equity
1.4Asset Ratios
1.5Interest & Dividend Cover
1.6Per Share Data
1.7Other Trends

Diagrams:

A. Pofitability
B.Liquidity
C.Debt to Equity and Liquidity
D.Asset Ratios
E.Interest & Dividend cover
F.EPS and Dividend
G.Net Assets per share vs. Return on Assets

2.0Analysis of Ratio & Trends
2.1Profitability & Efficiency
2.2Risk
2.3Business Risk
2.4Per Share Data

Part B

Summary & discussion on the uses and limitations of ratio anaylsis in the context of historical cost accounting and fair value accounting

Part A:

Summary:
The following report on VKM Ltd. represents an analysis across time and utilizes provided financial ratios based on historical cost convention, covering a consecutive 5 year time period (2002-2006). No comparison reference data for the respective industry is available. The provided ratio data suggests that financial and business risk has increased over the provided timeframe. VKM is using its assets, in a less profitable and less efficient way and there is indication that continuation of current dividend policy will further increase risk of liquidity problems and business risk. Ratio analysis in general cannot replace fundamental data analysis and should always be accompanied by such to allow accurate decision making. Review of the actual financial statements of VKM, including notes will be necessary for further insight, verification of data and observed changes and to allow root cause analysis including corrective action. Analysis and Report:

1.0 General Trends Of Single Ratios: The ratio data provided indicates the following trends:

1.1 Profitability:
Profit Margin shows initial mild decrease over 2 years but overall increase of ca. 7% while Return on Assets demonstrates a decrease of ca. 11% over the same 5 year time period. (See Diagram A)

1.2 Liquidity:
Current Ratio as well as Quick Ratio demonstrate initial upward trend with following reduction. There is an overall trend towards reduction (ca.23 (25) % and 20 (34) % respectively). (See Diagram B)

1.3 Debt to Equity:
Overall a very strong trend towards increase of Debt to Equity ratio is observed (80% overall or 510% over 4 years from 2003 -2006). Note is...
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