Understanding and interpreting financial data Coursework

Understanding and interpreting financial data - Coursework Example The vast competition and globalization that businesses face today means necessary steps to ensure continuous growth must be put in place. One method of doing this is the analysis of financial ratios. In this case, Bravo Ltd can obtain financial ratios using their latest financial statements and comparing the results with a competing business within the same industry. Alternatively, a business with the best business practice and a good track record is chosen as a benchmark for Bravo Ltd's improvement.It is a tool for interpreting the financial statements to assess financial and management performance. There are several types of financial ratios available that will benefit Bravo Ltd: Liquidity Ratios, Asset Management Ratios, Profitability Ratios and Gearing Ratios. Each ratio is measured differently and used according to the necessary analysis needed. This measures the ability of Bravo Ltd to meet its short-term financial liabilities as they fall due. It is of particular interest if Bravo Ltd wishes to extend its short-term credit facilities. There are two kinds of Liquidity Ratio - Current Ratio and Quick Ratio.Stocks are excluded in the calculation because stocks may include items that have uncertain liquidation values. Ideally, a ratio of 2 is considered safe for the former while a ratio below 1 is recommended for the latter.This measures how well Bravo Ltd utilizes its assets for the benefit of its business. Having a sound ratio will ensure that Bravo Ltd is better received by would-be investors. We will look at Inventory Turnover, Receivables Turnover, Average Collection Period and Fixed Asset Turnover. Inventory Turnover = Cost of Goods Sold / Inventory Receivables Turnover = Credit Sales / Accounts Receivables Average Collection Period = 365 / Receivables Turnover Fixed Asset Turnover = Sales / Fixed Assets Generally, a high turnover ratio is preferred. 2.3 Profitability Ratio There are several ratios available that can measure the ability of Bravo Ltd to generate profits from its sales. These include Gross Profit Margin, Return on Assets and Return on Equity. Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales Return on Assets = Net Income / Total Assets Return on Equity = Net Income / Shareholders' Equity A good profit margin is essential in any form of business to ensure there is always enough cash to run its operations. Thus, it is also important that receivables are collected on a timely basis. 2.4 Gearing Ratio This assesses the financial risk of Bravo Ltd. A high gearing ratio poses risks if Bravo Ltd is unable to meet its financial obligations as this can very well lead to bankruptcy. Therefore, it is important that this is constantly monitored. The ratio is used is Debt to Equity Ratio. 3 FINDINGS RATIO 2007 ('000) 2008 ('000) Working Result Working Result Current Ratio 1770 / 560 3.16 2490 / 840 2.96 Quick Ratio 1770 - 930 / 560 1.50 2490 - 1250 / 840 1.48 Inventory Turnover 3020 / 1770 1.71 4550 / 2490 1.83 Receivables Turnover 4940 / 820 6.02 6850 / 1230 5.57 Average Collection Period 365 / 6.02 60 Days 365 / 5.57 66 Days Fixed Asset Turnover 4940 / 2600 1.90 6850 / 3210 2.13 Gross Profit Margin 1920 / 4940 39% 2300 / 6850 34% Return on Assets 460 / 4370 11% 450 / 5700 8% Return on Equity 460 / 3810 12% 450 / 4860 9% Debt to Equity 560 / 3810 15% 840 / 4860 17% Our findings show that Bravo Ltd has a good Liquidity Ratio. Its Current Ratio is 2.96 (3.16 in 2007) and its Quick Ratio is 1.48 (1.50 in 2007). This means Bravo Ltd is more than able to generate enough cash to settle its short-term liabilities. There has only been a slight change in its Liquidity Ratio over two years. As a guide, a current