Analysing the Financial Performance of Garner Ltd †Free Samples

Question: Discuss about the Financial Performance of Garner Ltd. Answer: The main objective of this report is to focus on the calculation of various ratios of Garner Ltd for the year ended 2007 as well as 2008 for analysing the financial performance of the company. The report will mainly focus on profitability and liquidity position of the company through various ratios like profitability ratio and liquidity ratio. The ratios can be calculated as follows Ratio Formula 2007 2008 Current ratio Current assets/current liabilities 2.21 1.27 Quick ratio Current assets less inventories / current liabilities 1.68 0.97 Debt ratio Total liabilities / total assets 0.38 0.40 Inventory turnover ratio Cost of sales / average inventory 3.68 Accounts receivable turnover ratio Credit sales / Average accounts receivable 6.00 Gross profit percentage Gross profit/sales * 100 40.00 41.67 Profit margin Profit/Sales *100 9.00 10.00 Return on total asset EBIT/Net assets 0.49 0.52 Return on owner's equity Profit after tax / Total equity 0.18 0.21 Looking at the liquidity ratio of the company that is the current ratio and quick ratio of the company, it can be identified that both current ratio and the liquid ratio of the company is in decreasing trend (Bodie, 2013). The current ratio of the company decreased to 1.27 in 2008 as compared to 2.21 in 2007 whereas, the quick ratio of the company decreased to 0.97 in 2008 as compared to 1.68 in 2007. As the liquidity ratios indicate the capability of a company to pay off its short-term obligation, the decreasing trend is indicating that the companys ability to pay-off its short term obligations is decreasing (Waemustafa Sukri, 2016). Looking at the profitability ratios like percentage of gross profit as well as profit margin and return on total assets ratio, it can be identified that all the profitability ratios are in increasing trend that indicated that the company is strong, stable and have a good growth prospect for the future year. The growth prospect and upward moving profitability ratios will definitely attract the investors for investing their fund (Babalola Abiola, 2013). If the stability ratio of the company that is the debt ratio and liquidity ratios are considered, it can be identified that the debt ratio of the company has been slightly increased to 0.40 in 2008 from 0.38 in 2015 (Nyabwanga et al., 2013). A debt ratio of generally 0.5 or lower is considered to be reasonable as it indicates that the company is less risky or to be more specific, the liabilities of the company is just 50% of its assets. Further, though the liquidity ratios are in decreasing trend, the company is still in better position to pay-off their current obligations. Therefore, it can be said that the company is stable and will be considered as solvent over the coming years (Haslem Longbrake, 2015). From the above analysis, it is concluded that from all the aspects like profitability, stability and liquidity, the company is performing well and will be considered as stable from the investing prospect. The company will therefore, be able to borrow money, avail good credit terms and attract the investors to invest their fund. However, as the liquidity ratios are in decreasing trend, Garner Ltd shall look into the matter as further fall will threaten its repaying capability of short-term obligations. References Babalola, Y. A., Abiola, F. R. (2013). Financial ratio analysis of firms: A tool for decision making.International journal of management sciences,1(4), 132-137. Bodie, Z. (2013).Investments. McGraw-Hill. Haslem, J. A., Longbrake, W. (2015). A discriminant analysis of commercial bank profitability. Nyabwanga, R. N., Ojera, P., Simeyo, O., Nyanyuki, N. F. (2013). An empirical analysis of the liquidity, solvency and financial health of small and medium sized enterprises in kisii municipality, Kenya. Waemustafa, W., Sukri, S. (2016). Systematic and unsystematic risk determinants of liquidity risk between Islamic and conventional banks.