Proper accounting supports company officials while they make these decisions, showing them whether or not an investment will be practical, and if the company can afford it. Ethical and professional accounting forms a clear financial image of a business, and allows managers to make informed decisions, keeps investors abreast of developments in the business, and keeps the business profitable.
The business performance of a company can be monitored and analysed with the use of accounting ratios. The ratios are used to interpret financial information about the company. The results can be compared with past results or with industry standards to gauge the company’s overall performance. The quantitative results for this segment can be found in the Appendices section of this report.
Company A’s Current Ratio is 1.17, while Company B has 1.03 and Company C resulted in 2.5. This means that all three companies are still able to generate enough cash to settle its short-term liabilities. As a guide, a current ratio of 2 is ideal. For Company C, its result is higher than the ideal guideline and this suggests that Company C may have resources lying idle, for instance, the untimely collection of its receivables. A better ratio to consider when looking at the liquidity of the companies would be the Liquidity Ratio. This ratio does not take into account the companies’ stocks, which can be difficult to value and which can be obsolete.
This assesses the financial risk of a company. A high gearing ratio poses risks if a company is unable to meet its financial obligations as this can very well lead to bankruptcy. Therefore, it is important that this is constantly monitored.
Debt-Equity Ratio = Total Long Term Debt / Total Equity
The Gearing Ratios for all Companies A, B and C are quite low at 9.2%, 8.1% and 15.4% respectively and the results should not cause an alarm. However, it is good to note that the companies should have a balanced mix of equity and debt to finance its operations.
Return on Asset
There are several ratios available that can measure the ability of a company to generate profits from its sales. These include Gross Profit Margin, Return on Assets and Return on Equity. A good profit margin is essential in any form of business to ensure there is always enough cash to run its operations. Thus, it is also important that receivables are collected on a timely basis. Return on Asset is a type of profitability ratio and measures the level of profit compared to the value of net assets invested in your business.
Return on Assets = Net Income / Total Assets
The profitability of all three companies is sound. The Return on Assets are 1.7%, 1.3% and 3.3% for Companies A, B and C respectively. It can be seen that Company C generates the highest return on its assets, whereas Companies A and B are