Ratio Analysis of TCG Ltd Samples for Students †MyAssignmenthelp.com

Question: Discuss about the Ratio Analysis of TCG Ltd. Answer: Introduction: Ratio Analysis is a very important tool used by managers in analysing the performance and position of a company. It facilitates comparative analysis and assists in decision making process (Society for Human Resource Management. This assignment calculates some key ratios of TCG Ltd. based on the data available from income statement and balance sheet of 2016 and 2017. It further analysis the performance of company in terms of profitability, performance, liquidity and solvency as depicted through the ratios calculated. Key Ratios of TCG Ltd. for 2016 and 2017: Ratios Formula Calculation (2017) Result (2017) Calculation (2016) Result (2016) 1. Return on Equity 19% 16% 2. Alternative Return on Assets 8% 5% 3. Alternative Profit Margin 5% 5% 4. Gross Margin 51% 43% 5. Total Asset Turnover 1.53 times 1.48 times 6. Days in Inventory 87.48 days 77.75 days 7. Days in Debtors 20.57 days 15.48 days 8. Current Ratio 0.97 times 1.22 times 9. Quick Ratio 0.25 times 0.46 times 10. Debt to Equity Ratio 1.28 times 1.92 tims Analysis of firms performance: Current ratio determines the efficiency level of a firm to pay its current liabilities with its current assets. 2:1 is considered as safe and idle current ratio. The current ratio of TCG Ltd. which was already low in 2016 i.e., 1.22 times further declined in 2017 to an alarming level of 0.97. This is because of significant decrease in amount of cash, receivables and other assets shown in balance sheet. This creates a risk for the firm in paying its short-term debts within time. Quick ratio has also declined from 0.46 to 0.25 against the idle ratio of 1:1. This is very concerning situation for firm as it shows that in case of urgent situation it doesnt have ready or quickly reliable cash to pay off its debt. Both the ratio shows that short- term solvency of firm is at risk (Wahlen, Baginski, Bradshaw 2010). The debt equity ratio of 1.92 times in 2016 to decreased ratio of 1.28 times which is below the idle ratio of 2:1 shows a sound position of company in terms of long- term solvency. This may be because it has mobilised its current assets in acquiring fixed and intangible assets and payment of long- term debts. But a very low debt equity ratio can prove costlier to firm and can further affect the return on equity (Lee, Lee Lee 2009). Days in inventory and days in debtors indicate the number of days it takes for a firm to convert its inventory and receivables in cash (Drake n.d.). The rise in number of days in both these case from 2016 to 2017 is not favourable for the company. It shows that it takes more time in realising cash from inventory and debtors. Given the low current ratio it further adds the concern in this issue. Asset turnover ratio, part of activity ratio measures the effectiveness of using the total assets of firm to generate revenue (Kimmel, Weygandt Kieso 2009). Return on equity, return on assets, Profit margin, and gross margin analyse the performance and profitability of the organisation. These ratios measure the operational efficiency of firm, i.e., how well it is utilizing its resources to generate sufficient earning for business and its shareholders (Nikolai, Bazley, Jones 2009). The rise in the figures of all these ratios from 2016 to 2017 shows the growing performance of the company. There is no idle number for these ratios. Higher the ratio, higher it is profitable and beneficial for firm (Berman Knight 2008). References: Berman, K. Knight, J., 2008, Financial Intelligence for Entrepreneurs: What you really need to know about the numbers, Harvard Business Press, USA. Drake, P. P., n.d., Financial ratio analysis, viewed on 20th July 2017, from https://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf Wahlen, J. M., Baginski, S. P. Bradshaw, 2010, Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective, 7th edn. Cengage Learning, USA. Kimmel, P. D., Weygandt, J. J. Kieso, D.E, 2009, Accounting: Tools for Business Decision Making, 3rd edn., John Wiley Sons, USA. Lee, A. C., Lee, J. C. Lee, C. F., 2009, Financial Analysis, Planning Forecasting: Theory and Application, 2nd edn., World Scientific, Singapore. Nikolai, L. A., Bazley, J. D. Jones, J. P., 2009, Intermediate Accounting, 11th edn., Cengage Learning, USA.