Business Decision Making, Muscat University, Oman
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Part B: Tests your ability to carry out financial ratio analysis and provide recommendations of actions that the company can take to improve its performance. Your analysis should include appropriate explanation of the meaning of the ratios used and a trend analysis. Your recommendations should address profitability, liquidity and efficiency.
a) Analyse the profitablity of Nawal Ltd.
Answer: Every organization have their major concern for the profitability of the business process. Profitability ratios are the most frequent used tools for the determination of the bottom line of the company and analysis of the return to the investors. In the case of Nawal Ltd., the profitability ratios that have been used for analysis are Gross Profit Margin, Operating Profit Margin, ROCE and Sales Growth. The analysis of those with respect to the company in question have been conducted below:
• Gross Profit Margin: This ratio helps in the analysis of the cost of goods sold with respect to the sales. This analyses the control of company with respect to inventory management and manufacturing costs. The larger this ratio the better is the position of the company. In the given case, the company's average ratio for the 5 years is above 60% which indicates a good sign. However, it is been noticed that the same is reducing over period of time and have reduced from 65% in 2014 to 60% in 2018.
• Operating Profit Margin: This ratio known as Earnings Before Interest and Tax is included in the income statement. This is the earning which is reflected before interest and taxes. This helps in the analysis of the overall efficiency by taking into account all the expenses. The larger the better is the position of the company. The company have shown mixed trend for this, since it have risen and then decreased but for the year 2018 it is the highest of all.
• ROCE: This is the important ratio reflecting the return of money on the capital being employed in the company by the shareholders. The higher the percentage, the better is the position of the company. For Nawal Ltd, there has been mixed trend for this, since it have risen and then decreased but for the year 2018 it is the highest of all.
• Sales Growth: This shows the increase in the sales from preceding years so as to reflect the capacity of the company for selling its product. The higher the better. The company's sales growth is at its peak in 2018 as compared to other years.
b) Analyse the liquidity of Nawal Ltd.
Answer: The liquidity ratio helps in analysis of the capacity of the company to repay its immediate debt. The same have been analysed below:
• Current Ratio: This ratio reflects the capacity of the company to pay its debt obligations on the basis of assets held by it. It is usually takes into assets and debts that are for short period like for a period of less than twelve months. The ideal current ratio is greater than 1 and higher this ratio the better is for the company. For Nawal Ltd., the current ratio have reduced over period of time till 2018 to a great extent that reflects that company have materialised its current assets but the current liability have remained unaltered.
• Quick Ratio/ Acid Test Ratio: This is more stringent ratio for testing the liquidity since it does not takes into account Inventory as asset for paying its short term obligations and the ideal result of this should be greater than 1. The company Nawal Ltd., can pay off its debt obligations without considering its inventory since the ratio is greater than 1 in all the years but the same have been reducing.
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c) Analyse the Efficiency of Nawal Ltd.
Answer: The efficiency ratio helps in the analysis of the ability of the company to use its assets along with its management of liability for short term period. The same have been analysed as below:
• Asset Turnover Ratio: This helps in the measurement of the ability of the company in generation of revenue from its assets. A higher result shows that the assets are used effectively by the company and vice versa. This ratio is the highest in the year 2018 that reflect that the policies of the company are helping in the company in using its assets to generate revenue effectively.
• Inventory Turnover: This helps in the management of the inventory of the company in generation of sales. A higher result greater than 1 is idle. This ratio is the highest in the year 2018 that reflect that the policies of the company are helping in the company manage its inventory effectively.
• Debtors Collection Period: This ratio helps in analysing the period that is average being taken by the business for collection of its money owed to the debtors. The lower the period the better is the case for the company. In case of Nawal Ltd., the days of collection are coming down over period of time which means that the company is having enhanced policy of debt management.
• Creditors Collection Period: This ratio helps in analysing the period that is average being taken by the business for paying money that it owes to its creditors. The higher the period the better is the case for the company. In case of Nawal Ltd., the days of collection are coming down over period of time which means that the company is not having enhanced policy of management of its creditors.
d) Provide six recommendations to Nawal Ltd on how it Gill improve its performance.
Answer: The recommendations are as below:
• The company should have effective policy for management of its creditors so that they can get more time for paying them.
• The company should have always have sufficient assets that can be used for paying their liabilities that are due within the near future.
• There should be maintenance of effective profitability policies so that there is minimal fluctuation over period of time
• The company should have minimum about of stock showing as inventory at the end of the year and also throughout the year
• There have been major fluctuation in the collection of money from the debtors.
• The performance can be improved if the company have policies framed that can be executed easily.
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