Financial statements interpretation Essay Example | Topics and Well Written Essays - 1250 words

Financial statements interpretation - Essay ExampleThe main reason is that the ratios are simple to calculate. Moreover, they provide a tired for comparison between companies or between the club and the industry in general. They can also be applied to various time periods of the same company and can provide valu suitable information related to the trend and future prospects (Pendlebury and Groves, 2004). The ratios that are chosen for analyzing VDB Limited include Operating Profit Margin, Return on Assets, Current proportion, Quick symmetry, Average Collection Period, Stock turnover period. The ratios are computed for VDB Limited based on the financial statements provided for the two years. This will provide a base for comparison of theThe profit margin is the measure of the companys susceptibility to earn profit from the generated revenue. This is a very important and crucial ratio as this depicts the earning talent of the company (Samuels et al, 2000).It is clear from the valu es that the profit margin has declined steeply in 2008 relative to 2007. Though the revenue is much higher in 2008, the purchases and the expenses are relatively higher and hence lesser profits.This ratio measures the income generating ability of the assets. ... This ratio is necessary, since the income or the earnings is given higher importance and a company should not notwithstanding have high revenues, but should also earn the income from it. The return on assets is computed asReturn on Assets = (Net Income / Total Assets) * 100Profitability20072008Return on Assets10.53%7.89%It is evident that the assets are not being utilized at the same level as that of 2007. The income generating ability of the assets has come down in 2008. iii. Current RatioThe current ratio is a measure of the companys ability to cover its current liabilities using its current assets (Samuels et al, 2000). It is computed as Current Ratio = Current Assets / Current LiabilitiesRatio20072008Current Ratio3.162 .96The current ratio is a measure of liquidity and it indicates that VDB Limited is well positioned in terms of liquidity and will be able to cover its liabilities. Though the ratio has reduced in 2008, it is still very substantial and a healthy value.iv. Quick RatioThe quick ratio is a measure of the companys ability to cover its current liabilities using its liquid assets. The assets included in this ratio are those which can be easily converted to currency (Samuels et al, 2000). It is computed as Quick Ratio = (Current Assets - Inventories) / Current LiabilitiesRatio20072008Current Ratio1.51.48VDB Limited has sufficient liquid assets to cover the current liabilities. There is no stir in the quick ratio in 2008. v. Average Collection PeriodThe time period (no. of days) taken to collect the receivables is a crucial measure that illustrates the companys ability to collect the debts (Samuels et al, 2000). It is computed asAverage Collection Period = (Average (net) Receivables) / Ne t Sales) *