Managing through information (finance exam) - Essay Example

However, the major point of concern is the Gearing Ratio, which has dramatically increased from 0% to 36.1446% in a year due to the long-term loan, this increases the risk of investment, and in addition the Dividend Payout Ratio has also decreased from 40% to 21.28%, which is a bad signal for the shareholders. In 2008 no interest had to be paid, but in 2009 interest also needs to be paid from the reserves, thereby reducing reinvestment into the company. Johnsons Ltd. should focus upon clearing the debt as early as possible, and clarify to the investors that it is for the betterment of the company.

Furthermore, it should try to reduce the gearing ratio by increasing ordinary shares, either through new issuance or issue of bonus shares. Financial ratios aid in analyzing, controlling and improving the performance of a company, it also helps in attaining loans from banks, it can provide sufficient information to analyze the liquidity and performance of the firm, and points out the areas requiring improvement. However, ratios have certain limitations as well, for larger companies it is difficult to make comparative analysis as it becomes extremely complicated, firms set their targets at average instead of following market leaders, hampering the efficiency of the company.

The major drawback of ratio analysis is that it does not account for inflation and therefore can mislead the managers. Apart from inflation, seasonal variations can create distortions in the results as well, furthermore many valuations used in the ratios such as depreciations, inventory, bad debts etc are approximates and can thus affect the end result. The user of these ratios must know how to differentiate between wrong results and should be capable of adjusting to various situations (Besley and Brigham, 2008, 68).

It is obvious from the calculations that none of the three proposals is good, since they give fewer profits than the current system, Proposal A