Financial statements interpretation Essay Example | Topics and Well Written Essays - 1250 words

Financial statements interpretation - Essay Example The main reason is that the ratios are simple to calculate. Moreover, they provide a standard for comparison between companies or between the company and the industry in general. They can also be applied to various time periods of the same company and can provide valuable information related to the trend and future prospects (Pendlebury and Groves, 2004). The ratios that are chosen for analyzing VDB Limited include Operating Profit Margin, Return on Assets, Current Ratio, Quick Ratio, Average Collection Period, Stock turnover period. The ratios are computed for VDB Limited based on the financial statements provided for the two years. This will provide a base for comparison of the The profit margin is the measure of the company's ability to earn profit from the generated revenue. This is a very important and crucial ratio as this depicts the earning capacity of the company (Samuels et al, 2000). It is clear from the values that the profit margin has declined steeply in 2008 relative to 2007. Though the revenue is much higher in 2008, the purchases and the expenses are relatively higher and hence lesser profits. This ratio measures the income generating ability of the assets. ... This ratio is necessary, since the income or the earnings is given higher importance and a company should not only have high revenues, but should also earn the income from it. The return on assets is computed as Return on Assets = (Net Income / Total Assets) * 100 Profitability 2007 2008 Return on Assets 10.53% 7.89% It is evident that the assets are not being utilized at the same level as that of 2007. The income generating ability of the assets has come down in 2008. iii. Current Ratio: The current ratio is a measure of the company's ability to cover its current liabilities using its current assets (Samuels et al, 2000). It is computed as Current Ratio = Current Assets / Current Liabilities Ratio 2007 2008 Current Ratio 3.16 2.96 The current ratio is a measure of liquidity and it indicates that VDB Limited is well positioned in terms of liquidity and will be able to cover its liabilities. Though the ratio has reduced in 2008, it is still very substantial and a healthy value. iv. Quick Ratio: The quick ratio is a measure of the company's ability to cover its current liabilities using its liquid assets. The assets included in this ratio are those which can be easily converted to cash (Samuels et al, 2000). It is computed as Quick Ratio = (Current Assets - Inventories) / Current Liabilities Ratio 2007 2008 Current Ratio 1.5 1.48 VDB Limited has sufficient liquid assets to cover the current liabilities. There is no change in the quick ratio in 2008. v. Average Collection Period: The time period (no. of days) taken to collect the receivables is a crucial measure that illustrates the company's ability to collect the debts (Samuels et al, 2000). It is computed as Average Collection Period = (Average (net) Receivables) / Net Sales) *