Financial reporting analysis - Essay Example

Under this ratio, a business’s efficiency to use its material and labour is analysed with the residue of the revenue and the costs reflecting the gross profit. Net Profit Margin: This ratio is almost similar to the Gross Profit ratio with a further extension of scrutinising the administration and other selling costs – resulting in the net profit for an organisation. The ratio displays the net profit of a company as a percentage of its revenue. Return on Capital Employed: This is an important measure of evaluating a company’s profitability.

It measures the efficiency of a firm towards utilising the funds invested in it (Fridson & Alvarez, 2002). Liquidity Ratios evaluate a company’s ability to pay off its debts as soon as they fall due. These ratios are used to analyse a company’s ability to continue its operation in the long run. Bankruptcy is one major issue that is highlighted while analysing the liquidity ratios. There are two main types of liquidity ratios: Current Ratio: This ratio assesses a company’s ability to pay off its short term liabilities with its current assets.

Usually the benchmark is to have twice the amount of current assets as compared to the current liabilities but this varies within different industries. Quick Ratio: Quick ratio analyses a company’s ability to pay off its current liabilities with its most liquid assets i.e. excluding costs – which takes time to convert into cash. The usual standard is to keep a 1:1 ratio (Helfert, 1997). The Gearing or the leverage ratios give an insight to the risk faced by an investor within a company. This risk is usually affiliated with the financing of the company whereby a firm which is highly financed via debt is considered to be a risky venture for potential investors.

Since both Essakane plc and Westwood plc are not hugely affected with any major debt financing issues, the gearing ratios for the company may not be analysed. Market value ratios