Financial Statement - Essay Example

Since it should be goal of he company to benefit its shareholders, it is called bottom-line measure of performance.Accordingly it is 22.5 % as calculated below Return on equity= Net profit after tax/ Total equity =m 467/ 2074 = 22.5 % for 2005-06 = " 392/1397 = 28.06 % for 2004-05The decline in ROE in 2005-06 is due to abnormal increase in other reserves shown under equity.This is also known as Return on capital employed (ROCE) and also calculated on pretax profit.

Liquidity/SolvencyLiquidity means the speed and ease with which an asset can be converted into cash. Liquidity has two dimensions. Ease of conversion versus loss of value. Any asset can be converted into cash if its price is cut sufficiently. A highly liquid asset is therefore one that can be sold without significant loss of value. An illiquid asset is one that cannot be quickly converted into cash without a substantial price reduction. Assets are listed on the Balance Sheet in order of liquidity meaning that the least liquid assets are listed first.

Current assets are Cash and those assets convertible into cash over the next 12 months. Bills Receivable for instance represents amounts collectible from the customers for sales already made to them. These are therefore expected to be realised in the near future. Inventory that is stock-in-trade is the least liquid of the current assets. Current Ratio is one of the best known and most widely used ratios to ascertain company's solvency/liquidity. It is defined as Current Ratio = Current Assets / Current LiabilitiesCurrentAssets m 3,666/Current Liabilities m 3,432 = Current Ratio1.

07 for 2005-06 " " 2,752/ ". Assets are listed on the Balance Sheet in order of liquidity meaning that the least liquid assets are listed first. Current assets are Cash and those assets convertible into cash over the next 12 months. Bills Receivable for instance represents amounts collectible from the customers for sales already made to them. These are therefore expected to be realised in the near future. Inventory that is stock-in-trade is the least liquid of the current assets.

The current ratio of 1.07 indicates that company is efficient enough to use all its current assets without keeping them surplus and idle. It has also shown remarkable improvement from the last year's negative current ratio of 0.84. Quick ratio is calculated ignoring the value of inventory included in current assets for its obvious shortcomings of the least liquid of all current assets besides possible overvaluation and inclusion of damaged, obsolete and lost stocks. It can also include over purchased and slow moving items.

These will impede liquidity. Quick Ratio or Acid -Test ratio is so named to indicate the current assets sans inventory's quicker liquidity. BA has no stock in trade as mentioned above except for "expendable spares and other inventories" valued m 83 since it is a service industry.