Financial Information and Critical Analysis of Ratios of Watley's Furniture

Critical analysis of ratios of Watley's Furniture

INTRODUCTION TO FINANCE

MID MODULE ASSIGNMENT

CONTENTS

IntroductionPage 3

Part 1: Computation of selected ratiosPage 4 – 5

Part 2: Critical Ratio AnalysisPage 6 – 9

RecommendationsPage 10

ReferencesPage 11

Critical analysis of ratios of Watley's Furniture

INTRODUCTION

Financial statements are precious documents that indicate a company's economic activities and transactions in the context of doing business. In most cases, it is through these financial statements, such as the balance sheet, the income statement and the cash flow statement, that the financial analyst can come up with effective financial ratios to aid in various decisions for the financial users. In other words, the financial ratios can indicate the state of the company in terms of economic health and performance by predicting the future financial performance and prospects of activities. In matters concerning financial activities, the use of financial resources gets prone to several shortcomings which may impact the decisions made by the financial users. This is because the financial statements of companies, in this case, Watley furniture, get prepared in the past, and the decisions are made often to reflect the current and future scenarios of the company's performance. In that connection, the financial statements available for Watley furniture are from 2014 to 2015. They shape the focus of this critical analysis paper concerning the financial ratios covered in parts 1 and 2.

Part 1: Computation of selected ratios

In that regard, part 1 of this paper reviews all the financial information offered by Watley's Furniture with a stern look at the broader categorization of liquidity, profitability, activity and gearing as financial ratios. Based on the liquidity ratios of Watley's furniture, the current ratio makes a lot of sense in this case. On the activity ratio, the asset turnover ratio measuring the ability of the company to convert its assets into quick cash and cash equivalents is given priority. The third category of ratio analysis is the profitability ratio, where the profit margin centers on the ability of the company to convert assets into profit. The last financial ratio category is the gearing ratio, where the total debt to total equity ratio is considered. Drawing from the choice and selection of the ideal financial ratios from each category above and their calculation is shown in table 1 below, the revelation is that ratio analysis proves to be a perfect tool and technique for many businesses to assess and analyze the exact financial performance in a given period. The essence here is to develop sound development plans that can take Watley's Furniture business to a new profitability level in terms of future business improvement and management.

Table SEQ Table \* ARABIC 1: Ratio Computation

To carry out ratio analysis, the excel software is helpful in this context. The chosen ratios from liquidity, profitability, activity and gearing ratios are run in excel using the excel formulas. The formulas automatically calculate or compute the selected financial items to arrive at the financial ratios that are useful in the critical analysis in part 2. For the reason that one financial ratio is chosen from the four categories mentioned and worked under the two years given, the total number of ratios would be 8, as shown in table 1 above.

Part 2: Critical Ratio Analysis

This section shows a critical financial analysis of the ratios calculated in table 1 above, in part 1, relating to Watley's furniture business with financial statements information. In broad terms, the four categories of financial ratios get addressed and critically analyzed concerning the future business development of plans and financial performance. In another language, the ratios get explained in detail, what they imply in this context and the advice on improving the future financial performance of Watley's Furniture business as described in the unfolding paragraph.

Liquidity ratios: Current ratio

One of the short-term measurements of a company's financial position and performance is the liquidity ratio. According to the study concluded by Tomczak (2014), liquidity ratios are regarded as measurements utilized by the company or business to assess and examine the capability of paying off short-term obligations, dues or debts. The prospective creditors, in addition to lenders of money, are fond of using this liquidity ratio to decide or make decisions on whether to extend their debit or credit to companies to assist them during financial hardships. Mainly, the liquidity ratios elaborate on the suitability of the busin