An external consultant to a company and you need to prepare a report Essay

An external consultant to a company and you need to prepare a report on their performance based on the information they provided - Essay Example However these figures do not show how efficiently the company is earning these profits. How much risk each company is taking to earn these returns is not known. The future prospects of the company with respect to its performance can also not be predicted by just looking at absolute numbers. It is important to analyze each figure in relation to the others to be able to conclude about a company’s performance. Hence, though company A is earning more than B, we need to look at the sales figures on which these profits are earned. Hence, if company B is earning this on a sale of $10,000 million while company A is earning it on sale of $20,000, company A is actually earning only 2.5% on its total sales while B is earning 3.5%. Hence, B is actually earning better. Similarly, if company B has very high debt with respect to its equity, then this company is highly leveraged and much riskier than A, though the absolute debt figures of company A might look bigger than B. Thus, ratio analys is which helps to establish relationship of one financial figure with the other helps in analyzing different companies in better light. Another advantage of ratio analysis is that it helps in comparing completely different balance sheets. For example, company A might publish its results in British pounds while B might do the same in Dollars. Ratios help in directly comparing the two companies irrespective of the currency they use in their financial statements. Ratio analysis also helps in analyzing a company’s performance by looking at its various business aspects i.e. profitability, liquidity, leverage, operational efficiency (turnover ratios) as well as market valuations. Various aspects of analysis We will conduct a time series analysis (for the various ratios) for Wm Morrison Supermarkets for a period from 2008 to 2010. We will also compare it with Tesco which operates in the same industrial sector. Other than the ratio analysis we will also compare some other aspects of their business like their market penetration, and their product line etc. Choosing the right ratios The various ratios we will be using will be based on following categories Profitability ratios – (Gross Profit, Net profit and Operating ratios) These ratios help in analyzing the efficiency with which the company has used its resources to generate profits. Gross profit sees the amount of profit earned after taking out the cost of sales which includes administrative and sales expenses. Net profit looks at overall earnings after taking into account all expenses including interest and tax expenses. Operating ratio takes into account operating expenses viz-a-viz sales. Liquidity ratios – (Current ratio, Quick ratio) These ratios show how easily a company can liquidate its short term assets to honor its short term liabilities especially the suppliers and financers. Turnover/activity ratios – (Fixed assets, Current assets and inventory turnover ratios and day’s receivable holding) These ratios help in analyzing how efficiently a company converts its assets into revenues. They also tell how effectively the company has used is resources to generate sales (revenues) (Loth 2011). Leverage – (Debt-Equity) These ratios tell about the amount of risk a company has taken and eventually its share holders are facing. Valuation ratios - ROI (Return on Investment) These ratios hel