Financial Statement Analysis Report - Assignment Example

?Financial ment Analysis Report According to the reading of Pamela Peterson Drake financial analysis is the given to the progression of selecting, evaluating and explaining to assist in investment and financial management. It is the process of assessing business in an attempt to plan and improve all financial details within an organization. It can be used internally to appraise issues such as effectiveness of employees, operations and credit procedures. Moreover, it can be used externally to evaluate potential investments and the worthiness of credit borrowers. The preparation of financial statement analysis requires financial ratios, accounting data from financial statements. The ratio assists in measuring strengths and weaknesses of the firm and allows trends and comparisons with other firms within the industry to be identified. It also covers the areas of liquidity, operating profits, financing and stockholders' return on investments (Collier, Grai, Haslitt, McGowan, 2004). In the condition given, Track Events Ltd. is owned by a local independent ticket agent who sells tickets for sporting events, and that is why he needs to analyse his financial accounts in order to determine boost in sales and to make sure that his business is not suffering from insolvency. Total revenue from commissions and profitability has varied widely over the last year. Revenue from commissions peaked over ?1,073,000 in 2010 and dropped to ?1,053,000 in 2011. This may be due to decrease in the demand for the tickets being sold. Assessing the profitability of Track Events Ltd. is very significant in order to determine future business plans. These profitability ratios indicate the increase in the profitability of current operations of the business. Operating profit margin helps to provide useful information for investors when examining the trend for determination of the company’s quality. It has risen from 9% in 2010 to 28% in 2011. This shows that the company’s management has succeeded in generating income from the business operations. This increase is due to revenues from commissions increasing faster than the expenses of the business. Furthermore, the net profit margin which shows the earning capacity of business has gradually increased over the year from 5% to 29%. This is a clear indication of the company being considered as more stable and profitable, after payment of all taxes and expenses. Possible reasons of this are the reduction in operating expenses and increase in sales. Return on Total Assets is a measure of net profit earned against the use of total assets. It has increased considerably from 2% to 14% over the year. This means that Track Events Ltd. is able to make use of its assets efficiently thereby increasing its profits. Decrease in the staff costs as a percentage of commissions earned from 62.5% to 48.7% informs that the company is able to keep more fraction of the commission after paying its staff costs as less staff costs per pound of commission earned is being paid. This drastic fall in salaries may either be due to reduction in salaries or laying off workers thereby increased productivity and reduced costs. Besides this, the evaluation in 2011 relative to the previous year concludes that the liquidity has increased, with the current ratio increasing over the year. This indicates that the position of the firm has improved and the firm is liquid enough to repay its debts. This significant increase may have been due to the increase in current assets by conversion of non-current assets into current assets, by borrowing or ploughing back profits. In addition, the decrease in current liabilities by paying off debts may also have caused this increase. The interest coverage of Track Events Ltd. has increased from 4% to 10%. This notifies that the debt burden of the company is lower and bankruptcy or default is less likely to be possible. This is due to the fact that this year Track Events made huge profits due to a radical increase in its incomes and a reduction in its expenses. Moreover, the gearing ratio has decreased over the year from 99% to 64% indicating that the company is primarily financed by equity and is not over-relying on the borrowings for a momentous section of the capital requirements of the company. This indicates that company is getting less risky. No interest commitments will have to be met before the dividends are paid and the business will not have any problem in raising finance if the expansion will be required. We can further deduce that the debtor days have increased to 153 days in 2011 compared with 61 days in 2010. This will decrease the quality of company's debtors and could lead to a greater risk indicating the potential weakness in the cash flow and an increase in the need for working capital. This increment may be due to rising number of debtors. The business should offer prompt payments to encourage debtors to repay earlier. Moreover, it should mostly make counter sales to avoid future cash flow problems. The return on capital employed has risen from 5% to 13%. This shows that the company is sufficient enough in generating profits relative to the funds invested and acts as a sign of investment performance. This may be due to better country economic conditions and restructuring of the organization. Conclusion After analyzing the financial accounts, I conclude that the conditions of Track Events Ltd. are favourable in 2011 compared to previous year. Its profitability has increased dramatically over the year. The business is being operated more efficiently as the expenses are being controlled effectively and it has been able to increase its revenue generated from sales. Furthermore, its current ratio has increased considerably which notifies that the business has increased its working capital and thereby its payment capability. The business is less likely to get bankrupt as its interest coverage has increased radically. Besides this, Track Events Ltd. is relying less on the borrowings. This ensures that the company is less geared and is mainly financed by profits and owners capital. Consequently, this company can be operated profitably in the upcoming years. Works cited Collier, Grai, Haslitt and McGowan. “An example of the use of financial ratio analysis: the case of Motorola”. ro.uow.edu.au. University of Wollongong. 2004. Web. 21 June. 2011. Drake. “Financial Ratio Analysis.” educ.jmu.edu. n.d. Web. 21 June. 2011. Read More