Financial Performance of Watley Company †MyAssignmenthelp.com

Question: Discuss about the Financial Performance of Watley Company. Answer: Introduction In every business, there is always a concern for the financial performance and what measures are needed to improve the financial performance of the organization. There are many ways to analyse the business performance and among them ratio analysis is very useful as it helps to evaluate the performance of the current year as well it helps to compare it with the financial performance of previous years. In this report financial performance of the Watley Company has evaluated using the ratio analysis in part A and comments are made on the financial performance of the company in part B with some recommendation. Ratio Analysis of the Watley Company: Liquidity Analysis Liquidity analysis helps in ascertaining the short term financial health of the company and provides the information on how the company manages the payments in respect to the current liabilities. Some of the important ratios of the liquidity analysis are current ratio, quick ratio, and working capital ratio. In this report there is need to calculate the ratio for each category so current ratio has been selected (Bender, 2013). Current Ratio: It is very important liquidity ratio as it provides availability of the current assets over the current liabilities. Current ratio measures the liquidity performance of the company provides the information about the short term performance in respect to payment required to make to suppliers and other short term liabilities. Formula: Current Assets/Current Liabilities Watley Company Financial Data Years Financial Items 2014 2015 Current Assets 300,000.00 480,000.00 Current Liabilities 270,000.00 210,000.00 Current Ratio 1.11 2.29 Activity Analysis In order to carry out the business there is need to carry out various activities in order to have sufficient flow of cash and other resources in the business process. Some of the important activities that business performed to maintain proper flow of cash in the business are inventory management, debtors management and creditors management. In this respect some of important activity ratios are inventory turnover ratio, debtors turnover ratio etc. In this analysis debtors turnover ratio will be calculated to notice the performance of the company in respect to collection of outstanding amount form the debtors (Besley and Brigham, 2014). Debtors turnover ratio or accounts receivable turnover ratio: This ratio is very important from financial performance point of view as it provides information on frequently company collects their outstanding debt amount from their customers in order to have proper flow of cash in the business. Formula: Average Credit sales or Sales /Account Receivable or Debtors Watley Company Financial Data Years Financial Items 2014 2015 Account Receivable 160,000.00 260,000.00 Sales 3,290,000.00 3,520,000.00 Debtors turnover ratio 20.56 13.54 Profitability Analysis Profitability analysis aims to examine the earning capacity of the company through effective use of the resources of the company. Company procures various inventory and fixed assets to manufacture the desired product and services in order to supply them to the customers. Proper management of assets will help the company to earn the maximum sales revenue and provide increase in the profit for the shareholders. In order provide the profitability analysis, the return on asset ratio has been calculated as it is very important ratio in this segment (Brigham and Ehrhardt, 2007). Return on Assets: In this ratio return means the percentage of profit earned using the resources of the business. As the ratio is in relation of the assets, this ratio will provide information regarding the percentage of the profit earned on the assets of the company. Here profit means the net profit of the company and asset means total assets i.e. both fixed assets and current assets. Formula: Net Profit/Total Assets Watley Company Financial Data Years Financial Items 2014 2015 Net Profit 400,000.00 300,000.00 Total Assets 1,550,000.00 1,630,000.00 Return on Assets 25.81% 18.40% Solvency / Gearing Analysis Capital structure in the any business organization plays very important role in the profitability of the company. There are mainly two types of capital, debt capital and equity capital. Equity capital refers to the owner capitals and there is no fixed charge on this capital. On the other hand debt capital is the borrowed capital and company has charge on the profit in form of the interest. Debt equity ratio will be calculated in this analysis to check the percentage of debt as compare to equity capital (Henderson, 2015). Debt Equity Ratio: This ratio tells the percentage of debt capital as against the equity capital. Lower debt capital in comparison to the equity capital shows that company depends on the equity capital mainly and more profit available for distribution to the shareholders of the company. Formula: Debt /Equity Watley Company Financial Data Years Financial Items 2014 2015 Debt 200,000.00 200,000.00 Equity 1,080,000.00 1,220,000.00 Debt Equity Ratio 18.52% 16.39% Financial Analysis In this part, critical analysis of the above calculated ratios will be done: Current Ratio: Current ratio of the company was 1.11 times in year 2014 and it was increased to 2.29 times in year 2015 that indicates that there is significant increase in the current assets of the company as against current liabilities. So it can be said that liquidity performance of the company is very strong in year 2015 as compared to year 2016. Although, it can be said that in both years company has been successfully able to meet the current liabilities expenses. Debtors turnover ratio: The debtors turnover ratio is 20.56 times in year 2014 and it was further reduced to 13.54 times in year 2015 that indicates that company activity efficiency is reduced in year 2015 as compared to year 2014. Return on Assets: Company has earned the profit of 25.81 % in year 2014 and it was reduced to 18.40 % in year 2015. It can be said that profitability of the company in respect to return on assets was good but there has been too much decline in profitability percentage in year 2015 as compared to year 2014. Debt Equity Ratio: Debt equity ratio is 18.52 % in year 2014 and got reduced to 16.39 % in year 2015. It can be said that capital formation of the company was excellent in both the years and there is positive decline in year 2015 that shows positive change in the capital formation of the company. Recommendation and conclusion On the basis of the overall analysis it is advised to the company to make proper strategies to collect the accounts receivable in shorter period of time in order to improve the debtors turnover ratio. There seem that company profit has declined in year 2015, so it is advised to have proper control on the expenses of the company like cost of sales and salaries wages has increased a lot in year 2015 as compared to year 2014, that can be easily controlled if proper measures taken. References Bender, R. (2013). Corporate Financial Strategy. Routledge. Besley, S. and Brigham, E. (2014). Principles of Finance. Cengage Learning. Brigham, E. and Ehrhardt, M. (2007). Financial Management: Theory Practice. Cengage Learning. Henderson, S., Peirson, G., Herbohn, K. and Howieson, B. (2015). Issues in Financia Accounting. Pearson Higher Education AU.