Ratio Analysis in Financial Accounting Assignment Sample

Introduction

Financial analysis refers to the process of evaluating financial statement of the firm which aids in understanding overall performance of the business entity. It is the most pivotal process that support in effectively depicting liquidity, profitability and solvency position of the organization. Boots plc is the British pharmacy and beauty retailer of UK which is having more than 2200 stores in UK. The market share of boots plc is 5.9% and has annuls revue of 7 billion pound in year 2023 (Description of Boot plc, 2024). The current report is based on the interpretation of Boot Plc’s ratio as to identify overall performance, liquidity and solvency position.

Section A: Interpretation Of Ratios

Return on Shareholders’ Funds

Boots UK Limited has a negative return on shareholders’ funds in 2020 and 21 i.e. -20.77 and -3.56 means business debts are more than its assets. It turns positive in 2022 and 23 by 0.22 and 3.89 showing good financial health of the business. It means that the business is able to return greater amount of money to its investors.

Return on Capital Employed

Return on capital employed of Boots UK Limited improved in 2023 as its ROCE is 1.92 which was increased from 2022. On the other hand, the ROCE of the company was negative in 2020 and 2021 i.e.-1.59 and -7.90. In recent years company able to decline in cost of operation by using technology which leads to increasing company profitability and efficiency to use capital.

Return on Total Assets

From the financial statement it is identified that Boots Limited has not used its assets in efficient manner in year 2020 and 21, therefore its return on total assets is -5.50 and -1.04. But in current years the company ROTA ratio has improved by 1.20 % which shows that company is using its assets efficiently as result remain profitable.

Profit margin

Boots limited has generated loss in 2020 and 2021 due to COVID pandemic but in 2022 the company profit margin are 0.06% which was increase in 2023 by 0.85%. The reason of increasing profit margin includes high retail sales due to strong marketing efforts and this is good for the company.

Gross margin

Gross margin refers to the percentage of revenue of the company after subtracting direct cost (Nariswari and Nugraha, 2020). The gross margin of company is 35.86 % which has increased by 1% in 2021 and remain consistent in current years. It highlight that company has good profit margin and company`s efficiency in manage production cost.

Net Assets Turnover

The net assets turnover ratio measures the efficiency via which an organization uses its assets to produce sale. From year 2020 to 23 company has assets turnover ratio above 1% and it increase to 2.26% in 2023 thsat means Boots Limited effectively use its owned resources to generate sales.

Fixed Assets Turnover

Boots Limited have 1.64% fixed assets turnover ratio which decline in 2021 by 0.5%. It currently increase to 2.26% in 2023 representing efficiency of the business to effectively use its fixed assets such as different building (outlets), vehicles, machinery to generates sales of the company.

Interest Cover

Interest cover ratio effectively use to uncertain a business`s ability to pay interest on its outstanding debt (Suranta, Satrio and Midiastuty, 2023). In 2020, the Boots Limited has no ability to pay interest on its debt as it is generating Losses. But with increasing in profit- margin company ability to paying interest increase by 1.77% in 2023.

Stock turnover ratio

It has identified that Boost Plc is able to manage its overall sales in the three consecutive years. Along with this, firm is able to attain ideal ratio which indicate effective marketing strategies which help in increasing overall sales of the business entity (Ramírez-Orellana et al, 2023). Further, firm should focus on innovation and reducing price which help in attracting large number of customers.

Debtor turnover

From the ratio analysis, it has been depicted that firm is incapable in quickly collect its funds form debtors which creates issue in managing overall cash flow of the organisation. To overcome the situation, firm should provide attractive discount on early payment and reform its debtor policy which help in reducing debtor turnover ratio.

Debtor collection

There is constant reduction in the debtor collection period which aids in managing overall cash flow of the organization. Firm should establish a strong set of payment terms which will help in quickly collecting form debtors.

Creditor payment

On the basis of three year evaluation, it has been identified that firm’s ratio is decreasing which indicates inefficient utilization of credit period. Boot plc should focus increase their credit payment period and use the funds for generating higher profits.

Current ratio

It has been determined that Boot Plc is not able to attain the ideal ratio indicate incapability of organisation in paying off short term liability. To overcome the situation, firm should sell out unproductive fixed assets and reduce personal drawing of the owners which help in increasing current assets (Brandi et al, 2022). Further, all the long term purchase should be delayed as to manage overall liquidity ratio.

Liquidity ratio

From the past three year, Boot Plc is not able to attain the ideal ratio indicating inefficiency in clearing out all the liabilities. To mitigate the issue, manager should focus over re amortized loan which help in reducing current liability. Further all the capital purchase should be avoided which help in managing overall cash in hand and support in effectively paying out all the short term liability.

Asset coverage

After evaluating the financial statement of boost Plc, it has been depicted that firm is not able to pay off all its liability after paying off assets. This is not an adequate indicator as it denotes inefficiency of firm in clarifying out debt which creates negative image of the business entity. To overcome the issue, firm should focus over maximizing its profits and increasing investment towards fixed assets.

Gearing

From the above table, it has been determined that firm is not having effective balance between debt and equity which creates issue in managing overall cost and expenses of the organization. The ratio is continuously reducing indicating low debt as compare to equity. This is not an effective position as more equity indicates higher firm’s cost (Halima and Wepukhulu, 2020). To overcome the situation more debt should be introduced which help in reducing cost as interest on debt is tax deductible expenses.

Limitation of accounting ratio

From the above evaluation, one of the limitation of the accounting ratio identified that inflation effects are not considered while preparing the financial statement as there are difference in inflation between each release. Therefore the ignorance of the inflation effect are not reflect in financial statement makes there comparison difficult (Olayinka, 2022). Another limitation is seasonal effects as the inability of the organization to adjust the ratio analysis according to the season ability effects leads to create false interpretations of the outcome from the analysis.

Conclusion

By sum up all it has been articulated that the financial analysis plays an important role in recognizing potential risks as well as vulnerabilities in financial performance of the business. The report evaluates the financial statement of the Boots UK limited to identified liquidity, solvency and profitability of the company. It is analyzed that the company suffering from losses in year 2020 and 2021, by changing its operation and by doing technical advancement, the organization able to enhance its gross margin, return to assets ratio.

Section B

Question1

Income statement of Stamer IT solution for the year ended 31 December 2024

Particulars	Figure (in £)	Figure (in £)	Figure (in £)
Sales			6,88,000
Purchases		375800
Opening stock		22500
Closing stock		12550
COGS			385750
GP			3,02,250
Less: indirect expenses
Audit and Accountancy		1000
Advertising		1200
Directors remuneration		52000
Electricity		4385
Insurance	5220
Less:	1500	3720
Office expenses		17000
Rent and rates	25000
Add: outstanding expenses	2725	27725
Wages and salaries		55000
Bank Interest		1520
Depreciation on F&F		18000
Depreciation on motor vehicle		9280	190830
Net profit			1,11,420

Balance sheet of Stamer IT solution for the year ended 31 December 2024.

Particulars	Figure (in £)	Figure (in £)
Assets
Non-current assets
Fixtures and Fittings	180000
Less: depreciation	18000	162000
Motor Vehicle	62000
Less: depreciation	9280	52720
Total Non-current assets		214720
Current Assets:
Prepaid insurance		1500
Closing stock		12550
Debtors		43250
Bank		2500
Total current assets		59800
Total assets (current + non-current)		274520
Liabilities
Long Term Bank Loan		20000
Current liabilities
Creditors	9200
Outstanding rent	2725
Accumulated depreciation	54000
Accumulated depreciation	15600
Total current assets		81525
Shareholders’ equity
Ordinary £1 shares (issued and fully paid)	25000
Profit and loss account	36575
add: net profit	1,11,420
Total Equity		1,72,995
Total Liabilities & shareholders’ equity		2,74,520

Five accounting principles followed while preparing the financial statements are as follows:

• At the time of recording expenses and profit accrual principle has been followed. Accordingly, related figure has been treated in the similar period when expenses incurred and revenue was recognized.
• Principle of consistency has already been followed so that comparison of financial statements can be done over the years (Generally accepted principle, 2023). On the basis of this, consistency in the accounting method is ensured.
• In line with the going concern principle it is assumed that organization will run for the indefinite period of time.
• As per cost principle assets are recorded at their historical cost which assures dependability and impartiality.
• According to the objectivity principle reliable information has been included rather than human judgments.

Question 2

Cash flow of Cleverly Limited for the year ended on 31^st December 2024

Particular	Amount	Amount
cash flow from operating activity
Net profit	-49500
(+)Non cash expenses
Depreciation	30000
operating profit before Working capital changes		-19500
(+)Trade receivables	1000
Bank overdraft	17000	18000
(-) Inventory	6000
Trade payable	11000	17000
Net cash form operating activity		15500
Cash flow from investing activity		10000
Sale of long term investment	10000
Net cash from investing activity		10000
cash flow from financing activity
Loan	25500	-25500
Net cash from financing activity
Total		0
Cash in hand at beginning		0
cash at the end		0

From the above cash flow it has been identified that firm has incurred huge loss due to which firm is not having any cash balance. Further, this situation denotes inefficiency of firm in paying off liabilities in the upcoming time.

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References

• Brandi, M.L., Ariceta, G., Beck-Nielsen, S.S., Boot, A.M., Briot, K., de Lucas Collantes, C., Emma, F., Giannini, S., Haffner, D., Keen, R. and Levtchenko, E., 2022. Post-authorisation safety study of burosumab use in paediatric, adolescent and adult patients with X-linked hypophosphataemia: rationale and description. Therapeutic advances in chronic disease, 13, p.20406223221117471.
• Halima, R. and Wepukhulu, J.M., 2020. Effect of financial innovations on financial performance of tier one commercial banks in Kenya. International Academic Journal of Economics and Finance, 3(6), pp.181-196.
• Nariswari, T.N. and Nugraha, N.M., 2020. Profit growth: impact of net profit margin, gross profit margin and total assests turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), pp.87-96.
• Olayinka, A.A., 2022. Financial statement analysis as a tool for investment decisions and assessment of companies’ performance. International Journal of Financial, Accounting, and Management, 4(1), pp.49-66.
• Ramírez-Orellana, A., Martínez-Victoria, M., García-Amate, A. and Rojo-Ramírez, A.A., 2023. Is the corporate financial strategy in the oil and gas sector affected by ESG dimensions?. Resources Policy, 81, p.103303.
• Suranta, E., Satrio, M.A.B. and Midiastuty, P.P., 2023. Effect of Investment, Free Cash Flow, Earnings Management, Interest Coverage Ratio, Liquidity, and Leverage on Financial Distress. Ilomata International Journal of Tax and Accounting, 4(2), pp.283-295.

Online

• Description of Boot plc. 2024. Online. Available through: < https://www.boots-uk.com/about-boots-uk/company-information/>
• Generally accepted principle. 2023. Online. Available through: < https://corporatefinanceinstitute.com/resources/accounting/gaap/ >.