Analysis of the Ratios - a Cap Resources Limited - Case Study Example

A REPORT ON RATIO ANALYSIS AND INTERPRETATION: A-CAP RESOURCES LIMITED By (Student’s Name) (Professor’s Name) (Institution’s Name) (City) (Due Date) Table of Contents: 1.0 Executive Summary……………………………………………………………...3 2.0 Introduction……………………………………………………………………….4 2.1 Return on Capital Employed……………………………………………………4 2.2 Asset Turnover....………………………………………………………………..4 2.3 Gross Profit Percentage...………………………………………………………..5 2.4 Net Profit Percentage ....…………………………………………………………5 2.5 Current Ratio………………………………………………….………………….5 2.6 Quick Ratio ………………………………………………………………………5 3.0 Analysis of the Ratios as Calculated……………………………………………..6 4.0 Recommendations…………………………………………………………………7 5.0 Conclusion………………………………………………………………………….8 References………………………………………………………………………………9 Appendix………………………………………………………………………………..10 1.0 Executive Summary: Accounting ratios for A- Cap Limited indicate an unfavorable profitability phenomenon in the year 2003, 2004 in comparison to 2005. The liquidity ratios have also deteriorated thus indicating that the firm has invested more on trading activities without increasing its working capital. A Cap Resources Limited was established in 2003 and continues to act as a subsidiary of Cardia Technologies Ltd. The Company majorly focuses on exploration of energy based resource materials such as Magogaphate tenements. Recently the Company established its activities in Africa, Botswana, where it continues to explore the aforementioned resource. The Company had its debt cleared in late 2003 hence was allowed to trade its stocks in the Newcastle Stock Exchange Program. A REPORT ON RATIO ANALYSIS AND INTERPRETATION: A-CAP RESOURCES LIMITED 2.0 Introduction: The paper will involve the calculations of various ratios whose aim is to try and establish the information required in making relevant accounting decisions. 2.1 Return on Capital Employed: = Formula, (Profit/ Loss before Interest and Tax / Capital employed)* 100 2009-2010 2010-2011 {(1,697,470) / 32,819,691}*100 {(3,738,349) /46,308,710}*100 = (5.17) % (8.07) % 2.2 Asset Turnover: Formula: (Sales / Capital Employed) * 100 2009-2010 2010-2011 = {329,081 / 32,819,691}*100 {614,227 /46,308,710}*100 1.00 % 1.33 % 2.3 Gross Profit Percentage: = Formula, (Gross Profit /Sales)* 100 2009-2010 2010-2011 (1,697,470) /329,081* 100 (3,738,349) /614,227 * 100 = (515.83) % (608.63) % 2.4 Net Profit Percentage: Formula, (Net Profit/ Sales)* 100 2009-2010 2010-2011 (1,697,470) / 329,081* 100 (4,199,179) / 614,227 * 100 = (515.83) % (608.63) % 2.5 Current Ratio: = Formula, (Current Assets / Current Liabilities) 2009-2010 2010-2011 6,753,332 /22,117,536 12,718,936 / 33,107,307 = 0.305 0.384 2.6 Quick Ratio: = Formula, (Current Assets less Stock / Current Liabilities) 2009-2010 2010-2011 = 6,753,332-194,222 /22,117,536 12,718,936-564,640 / 33,107,307 0.297 0.377 3.0 Analysis of the Ratios as Calculated: The move to select the above ratios as the most suitable ratios of analyzing the A-Cap Resources Limited financial statements is for the mere reason that these ratios are far much used in the determination of the efficiency of operations of any given organization as a whole. These ratios have been used to depict different evaluations; For instance, the Return on Capital Employed Ratio (R.O.C.E) has been used to effectively analyze the earnings of the shareholders of the company as well as the overall efficiency of the firm as a whole. Form the calculated figures above; it is safe to indicate that the overall performance of the Company (A-Cap Resources Limited) is deteriorating so fast. This is indicated by the overall differences that are established through the rates as a whole. In general, this means that the firm is not placed at a better position to pay share earning amounts to its shareholders as a whole. In fact the shareholders should expect to incur losses on the amount of equity they injected to the Company as working capital (Lawrence 1996). According to the figures provided by the calculation of the assets turnover, it is safe to indicate that the amount of capital the company utilizes for the purpose of making a sale of their product is increasing year in year out. This significant increase in the loss of the capital employed as equity minimizes the ability of the firm to retain the amount of working capital it so much needs for the purpose of survival. The usage of more capital to make sales reduces the amount of both current and non-current assets since there are no other sources of capital injection to the firm. It is also true to indicate that the Company is at the verge of not being able to pay its financial obligations (loans) since it is consuming so much of its revenue to trigger further sales. Gross profit Percentage Ratio has been used to calculate figures whose value will assist in establishing the scope of the underlying sales price as compared to the costs incurred by the A-Cap Resources Limited as a whole. The resultant increase of the figure ratios implicates that the Company is spending so much of its financial resources to make sales as a whole. The Company is selling their product at a price which is far much lower than what was actually spent when developing the same product. This huge difference that exists between the selling price and the costs incurred during product development has caused the Company significant amount of losses altogether. Net Profit Percentage figure that has been calculated is used for the purpose of evaluating the exact amount of financial resources which the Company utilizes whenever it makes a complete sale of its product altogether. This figure enhances the accuracy of the figures provided by the calculation of gross profit ration. According to the figures indicated by the calculations it is safe to indicate that the A-Cap Resources Limited is spending so much on the product than it actually receives from its sales in terms of proceeds as a whole (Khan & Jain 2006). The figures calculated for current ratio are also deteriorating. In normal circumstances the ratio is supposed to depict a 2:1 ratio but then moving from 2004 to 2005, it will be safe to indicate that A-Cap Resources Limited is consuming so much of its assets while plunging itself into debts that are reflected by the high ratio of liabilities. This scenario is somehow unproductive since the Company will not be able to repay its financial obligations or rather commitments altogether. 4.0 Recommendations: The following are the major recommendations which the firm should consider implementing if at all it desires to expunge itself from the losses it is experiencing: (I). A-Cap Resources Limited should embark on conducting a thorough research analysis of the market for its product before continuing with the manufacturing of the same. (II). A Cap Resources Limited should also embark on finding relevant accounting methodologies for which it can use to increase trading activities while at the same time increasing the working capital as a whole. (III). A Cap Resources Limited should somehow minimize its level of production since at the moment it is operating at a loss which is consuming so much on its assets thus it risks shutting down due to lack of necessary resources needed for the supporting of the operations altogether. It should be noted that this situation is brought about by the fact that the Company is using so much of its resources in a bid to make a single sale of its product (Woelfel 1993). 5.0 Conclusion: As a Company that is aimed at making profits thus increasing on the wealth of its subsequent shareholders, A-Cap Resources Limited is on the verge of closing since it is utilizing so much of its resources to post sales. In a normal operation, a company usually makes sales without any much efforts made into selling its products since there is the aspect of assessing the market before embarking on production as a whole (Morley 1984). The Company also risks not being able to meet its financial commitments such as paying its creditors who include the suppliers as well as the Bank loans altogether. This Company is also not placed at a better position of paying dividends to its shareholders and because of this aspect, it will be very hard to attract potential investors hence a weakening at the working capital of the Company as a whole. It is therefore reasonable to conclude that the management of the firm is perhaps not able to meet the objective of the firm altogether due to lack of speculative knowledge in the field of management. It is also safe to postulate that the firm is not best placed for positive competition with other firms within the energy industry and for this reason it will be very hard for the Company to attract potential investments altogether. References A Cap Resources Limited Annual Reports 2011. Statement of Financial Position & Statement of Performance, Retrieved on 18th May 2012, from Website Khan & Jain 2006. Management Accounting, Tata McGraw-Hill Education.(Print) Lawrence S 1996. International Accounting: Financial Ratio Analysis, Cengage Learning EMEA, New York Morley, M, F 1984. Ratio Analysis: Volume 5 of Institute of Chartered Accountants of Scotland Research Advisory Committee Monographs, University of Michigan, Gee $ Co. Woelfel, C, J 1993. Financial Statement Analysis: the Investor’s Self-Study Guide to Interpreting & Analyzing Financial Statements, McGraw=Hill Professional Appendix: 1.0 Executive Summary 2.0 Introduction 3.0 Analyzing the Relevant Financial Ratios 4.0 Recommendations 5.0 Conclusions Read More