Major Ratios Analysis of West Ham Company - Essay Example

? Ratio Analysis Table of Content Ratio analysis of company’s (West Ham) won ratios 3 Activity ratios 3 Debt ratios 3 Liquidity ratios 4 Profitability ratios 5 Financial statement ratios 5 Comparative ratio analysis of West Hum with its competitors 5 Activity ratios 5 Debt ratios 6 Liquidity ratios 6 Profitability and financial statement ratios 6 Reference 7 Ratio analysis of company’s (West Ham) won ratios Activity ratios Asser turnover ratio represents the net sales with respect to the total assets of the company. It is broadly called as asset performance that means how the company effectively manages its assets to generate substantial amount of sales with respect to its assets. In terms of both fixed asset and total asset turnover ration the company has been improving its asset turnover as higher the turnover rate better for the company. It has increased far more in 2011 from 2010 than that of in 2010 from 2009. But the reported percentage is not at all a good indicator of asset performance (NYU, 2012). Debt ratios Debt ratios determine the company’s over debt load an also mix of equity and debt. So these ratios evaluate the financial risk the company and its shareholders have been facing. Debt ratio is a compared unit of company’s total debt with respect to its total assets. Specifically it shows the amount of leverage the company is using. Higher debt ratio means the company is highly dependent on its leverage and the equity position of the company is very weak. So higher the ratio means more risk the company and its shareholder has been taking. Although the total liabilities of the company has been increasing over the year but the total assets also has been decreasing in similar proportion. As a result the ratio has increased more in 2011 than it decreased in 2010 from 2009. Debt equity ratio represents the overall status of debt of the company. It compares the total liability of the company with respect to the shareholders fund. It reflects a qualitative measurement of commitment of the suppliers, creditors, lenders etc compared to the commitment of the shareholders. The company has not been able to pay its creditors’ amount back totally in each year and remained due after more than one year. For this reason the amount has been decreasing only a rate of almost 5% which is negligible for this huge amount of debt. The company improved a lot in terms of shareholder’s equity in 2010 than that of 2009 as it reported the shareholder’s amount of ?13,063,000 from tremendous growth from -?290,000 in 2009. But in 2011 again it has come down to huge deficit of its shareholders’ fund. So, due to the deficit of the shareholders’’ equity in two alternative years except 2010 with respect to huge liability of the company, the shares of the company have become worthless. The main reason behind this the company is highly depended on its creditors which adversely affects the interest of investors or the shareholders towards this company. Interest coverage ratio is an indicator that determines the how easily the company can pay its interest on the basis of its gross earnings before paying interest and tax. Higher the ratio means the company’s gross earning is very high and it can easily pay the interest of its outstanding debt. This company has been reporting negative gross income i.e. loss before paying tax and interest. So has been able to pay interest expense of its outstanding debt and these have remained due or payable for the company (JMU, 2010). Liquidity ratios Current ratio represents the working capital position of the company as it is one of the important indicators of liquidity of a company. It measures the performance of the company regarding its short term ability to pay the short term liabilities of the company. The3 current ratio of the company is has been lower than 1 in all the tree consecutive years that means it has not been able to pay its liabilities as has remained lower than liabilities. Quick ratio or acid test ratio indicates that the company has enough short term assets to pay its current liabilities or not. If this ratio is less than 1 then the company cannot pay its current liabilities without the help its inventory. The liabilities of the company have been far more than the total of its current assets as well as the inventories. For this reason quick ratio has remained far less than 1. So, it has not the ability to pay its current liabilities. Profitability ratios Gross profit margin of the company has remained almost same over the past two years but the operating profit margin has been negative as it has not been able to earn operating income. As, earning before tax of the company has been also negative so net profit margin of the company also has been negative with respect to its revenue. Return on equity also has no meaning for this company as its net profit is negative over the years and also there has been a huge deficit in the shareholders’ fund. So both the negative numbers has resulted positive return numerically but is worthless in practice. Financial statement ratios Return on investment of the company has been negatively increasing that means it has not reported any return of its investment even for the shareholders investment (BATH, 2012). Comparative ratio analysis of West Hum with its competitors Activity ratios In terms of asset turnover ratio or the asset performance Southampton is far better than West Hum and Reading though West Hum is comparatively better than Reading. Debt ratios Southampton has more investment from the creditors than that of West Hum and reading and thus its debt ratio is higher than other two. Except Readers other two has reported deficit in shareholders’ equity with respect to huge liabilities. The shareholders have substantial amount o9f investment in Readers compared to others two companies. As all the companies have reported negative gross earning, no one among these has been able to pay the interest expenses for outstanding debts. Liquidity ratios According to the current ratios of three companies, all have reported current ratio as well as quick ratio or acid test ratio of less than one which means all the companies have more liabilities than sum of assets and stock they have. Profitability and financial statement ratios The earnings per share of these three companies have been negative due to negative return or loss. For this reason the return on investment is also negative for these three companies. Reference BATH. (2012). Ratio Analysis – main strength. [Ppt]. Available at: http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CHcQFjAA&url=http%3A%2F%2Fpeople.bath.ac.uk%2Fmnsipc%2FBath%2520intro%2520to%2520Bus%2520Acct%2FSupplements%2520to%2520PPs%2FUsed%2Fsupp%2520wk7.ppt&ei=voarT6KVJMHSrQe48bT1AQ&usg=AFQjCNGLNDpVZ2-prKIUoNiqWvs7ET9xFg. [Accessed on May 10, 2012]. JMU. (2010). Financial ratio analysis. [Pdf]. Available at: http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf. [Accessed on May 10, 2012]. NYU. (2012). Ratio analysis-overview. [Pdf]. Available at: http://pages.stern.nyu.edu/~hfried/download/Ratios.pdf. [Accessed on May 10, 2012]. Read More