Ratio Analysis Report

Topics: Asset, Generally Accepted Accounting Principles, Balance sheet Pages: 6 (1756 words) Published: June 17, 2008

The purpose of the following report is to aid Over the Hill Pty Ltd in planning the direction that the company may want to go over the next few years. The report entails a financial analysis and summaries, which will give the executive board an understanding of how well the current managing director is performing, and whether his contract should be renewed.

Figures were obtained from comparative balance sheets and profit and loss statements from the relevant years as well as additional information that was forwarded by the board. This information enabled the development of percentage and ratio analysis (see appendices), which was then used to create the report.

The investigation revealed that the company had improved its position compared to previous years. The profitability of the company was significantly better whilst the liquidity had remained reasonably steady. The solvency of the company had declined however, which affected the long-term obligations of the business.

Overall, the company is in a much sounder position than it had been a few years earlier. The management style of Mr Vinloony has improved the direction of the business and the forthcoming results have come reasonably promptly. It is therefore recommended that Mr Vinloony’s contract is extended for a further period as designated by the board to enable the company to continue its growth.


Over the Hill Pty Ltd on initial viewing seems to have had a fairly successful year in 2002 in comparison to its previous years. An analysis of the Vertical, Horizontal and trend analysis shows significant growth in 2002 (up 230%) in net profit compared to negative results in previous years. This is due to a combination of growth in net sales (up 18.18%) and a decrease in the operating expenses of the business (-1.16%) compared to 2001. The cost of goods sold did increase between 2002 and 2001 but was still under the percentage growth of the net sales.

The return of assets has increased steadily over the three years rising up to 13.61% from a low of 5.70% in 2000. This brings the return of assets well above the industry average of 9% and indicates that the company has managed its resources well in developing a fair return on its assets.

The return on shareholders equity has also boomed over the last year by an impressive 20.26% from 5.17% in 2000.This is a combination of increased profits and a decrease in the average shareholder equity, which is due to lower retained profits by the shareholders.

An increase in operating profit in 2002 also led to a substantial increase in the earnings per share that the company could obtain. The ratio for 2002 was at $0.69 compared to an estimated $0.27 in 2000.

The company had an extremely high dividend payout in 2001 (900%) followed by a more stable payout to its investors in 2002 (152%). This high percentage was due to the poor return of assets that the company had in 2000, in which the high dividend allowed the shareholders to use this money in areas that would be more beneficial to the company.

Strong sales and increasing profit margins have helped raise the company into a profitable situation that has not been seen too much in previous years. This has been helped by managing to decrease the number of expenses that the business had.


Over the Hill Pty Ltd ability to satisfy its short term obligations are still in a stable position at the current state but has decreased over the last couple of years. The current ratio has decreased from 2.6:1 in 2000, down to 2.38:1 in 2002. This is due to the company keeping fewer inventories as assets and more cash in the bank without decreasing liabilities at the same time. This has put the company below the industry average of 2.6:1 and raises questions on the short-term future of the company with its creditors and owners if this trend continues.

By checking the quick ratio (acid test) we can quickly see if the...
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