Name: Akbar Khan Roll No: 181889 Class: BSAF 4A Sub. To: Sir Abdul Khalid

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Name: Akbar Khan

Roll no: 181889


Class: BSAF 4A
Sub. To: Sir abdul Khalid
Subject: Financial Reporting 2

Liquidity Ratios:

The term liquidity is defined as the ability of a company to meet its financial obligations as they come
due. The liquidity ratio, then, is a computation that is used to measure a company's ability to pay its
short term debts.

Current Ratio: The current ratio is a liquidity ratio that measures whether a firm has enough
resources to meet its short-term obligations. It compares a firm's current assets to its current liabilities,
and is expressed as follows: The current ratio is an indication of a firm's liquidity. Current ratio=
Current Assets/ Current Liabilities

2014 2015 2016 2017 2018


0.72 0.59 0.62 0.95 0.65

Analysis:

We can observe the similar pattern in every year’s current ratio which means that there’s not much of a
difference. Current ratio should always be near or greater than one. In all the years, it less than 1 which
means company is facing difficulty in meeting its short term liabilities. It should try to increase its assets
or decrease the liabilities to get the ratio normalize

Quick Ratio:

In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity ratio, which measures
the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities
immediately.

Quick assets= current assets- inventory- prepaid expense

Quick ratio= quick assets/ current liabilities

2014 2015 2016 2017 2018


0.30 0.33 0.24 0.23 0.25

Analysis:

The company has bad quick ratio. Through the first 3 years it has remained drastically low. It started
increasing in 2015 but again fell down in 2016. The company’s quick ratio should always be greater than
one. Quick ratio less than one means company is facing difficulties in paying back its current liabilities
and it is a bad sign for partners and investors and company needs to improve this as quick as possible.

Net working capital:

Net operating working capital is a measure of a company's liquidity and refers to the difference between
operating current assets and operating current liabilities. Net working capital is a liquidity calculation
that measures a company's ability to pay off its current liabilities with current assets.

Net working capital= current assets-current liabilities/ total liabilities

2014 2015 2016 2017 2018


-0.18 -0.14 -0. 26 -0.24 -0.25

Analysis:

As we can see, company’s net working capital is negative throughout 5 year period. Negative working
capital is when a company's current liabilities exceed its current assets. This means that the liabilities
that need to be paid within one year exceed the current assets. In order to get everything back to
normal, company needs to increase its current assets.

Cash Ratio:

The cash ratio is a measurement of a company's liquidity, specifically the ratio of a company's total cash
and cash equivalents to its current liabilities. The metric calculates a company's ability to repay its short-
term debt with cash or near-cash resources, such as easily marketable securities. Cash ratio= cash &
cash equivalents/ current liabilities

2014 2015 2016 2017 2018


0.0081 0.0100 0.0106 0.0331 0.0151
Analysis:

A cash ratio lower than 1, indicates that a company is at risk of having a financial difficulty. However, a
low cash ratio may also be an indicator of a company's specific strategy that calls for maintaining low
cash reserves because funds are being used for expansion. The company has cash ratio of less than one
which is not good but we do not know the exact reason.

Activity ratio/ management efficiency ratio:

Activity Ratio refers to the type of the financial ratios which are used by the company in order to
determine the efficiency with which the company is able to use its different operating assets that are
present in its balance sheet and convert the same into the sales or the cash.

Inventory turnover ratio:

The Inventory turnover is a measure of the number of times inventory is sold or used in a time period
such as a year. It is calculated to see if a business has an excessive inventory in comparison to its sales
level.

Inventory turnover ratio= cost of goods sold/ average inventory

2014 2015 2016 2017 2018


7.816 7.15 7.02 5.83 4.747

Analysis:

a healthy turnover ratio is between 4 to 6. We can clearly see that company’s turnover ratio is quite
healthy one. In the first 2 years the inventory turnover ratio is greater than 7, we can call it as high
inventory turnover ratio. It means that the company's product is in demand. It could also mean the
company initiated an effective advertising campaign or sales promotion that caused a boost in sales. For
rest of the years, ratio is comparatively low but still stable and healthy one. So we can say that the
company in regard of sale of its inventory is a stable one and doing the best in this regard and no kind of
improvement is required.

No. of days inventory held:

The average number of days goods remain in inventory before being sold.

No. of days of inventory= no. of days in a period/ inventory turnover

2014 2015 2016 2017 2018


46.6 51 52 63 77
Analysis:

As we can see, the number of days keep on fluctuating every year and there is no pattern of increase or
decrease. So by seeing the values, we can say that this is the healthy rate because they are very few
days to hold inventory and it is being sold very soon. The number is gradually increasing every year but is
not out of limit.

Receivables turnover ratio:

Receivable Turnover Ratio or Debtor's Turnover Ratio is an accounting measure used to measure how
effective a company is in extending credit as well as collecting debts

Receivables turnover ratio= net credit sales/ average receivables

2014 2015 2016 2017 2018


321.2 350.7 255.6 181.6 63.9

Analysis:

A high ratio is desirable, as it indicates that the company's collection of accounts receivable is efficient. A
high accounts receivable turnover also indicates that the company enjoys a high-quality customer base
that is able to pay their debts quickly. And we can see that this company’s receivables ratio is high so it is
going good.

No. of days of sales outstanding:

Days sales outstanding (DSO) is the average number of days that receivables remain outstanding before
they are collected.

No. of days of sales = no. of days in a period/ receivables turnover

2014 2015 2016 2017 2018


6 2 1.42 1.04 1.1

Analysis:

The low no. of days indicates that company has very efficient accounts receivables system and gets paid
quickly by their debtors. This also tells us that company is very progressive as most of its account
receivables are not pending.
Payables turnover ratio:

The accounts payable turnover ratio is a short-term liquidity measure used to quantify the rate at which
a company pays off its suppliers. Accounts payable turnover shows how many times a company pays off
its accounts payable during a period.

Payables turnover ratio= net credit purchases / average payables


2014 2015 2016 2017 2018
0.22 0.26 0.16 0.06 0.08

Analysis:

The company has less than 1 payables ratio. This is not the healthy rate as this indicated that the
company is not paying of its debts on time and is liable to other companies. It shows that company is
taking a lot of time in paying its debt and is slow in this regard

. No. of days of purchases:

The accounts payable days formula measures the number of days that a company takes to pay its
suppliers

No. of days of sales = no. of days in a period/ payables turnover

2014 2015 2016 2017 2018


1659 1407 2281 6083 4562.5

Analysis:

The high number of days indicates that company is very slow in paying of its debts and takes a lot of days
to pay off its liabilities. The company should try to pay the liabilities as soon as possible to convert this
into a healthy rate.

Asset turnover ratio:

Asset turnover or asset turns is a financial ratio that measures the efficiency of a company's use of its
assets in generating sales revenue or sales income to the company.

Asset turnover ratio= net sales/ average total assets


2014 2015 2016 2017 2018
321.2 350.7 255.6 181.6 63.9

Analysis:

The company has high asset turnover ratio. This shows that the company is efficiently utilizing its assets
to generate the revenues. A higher ratio is favorable, as it indicates a more efficient use of assets. The
ratio has slightly decreased in 2018 but not at very unhealthy rate.

Fixed asset turnover ratio:

Fixed-asset turnover is the ratio of sales to the value of fixed assets. It indicates how well the business is
using its fixed assets to generate sales.

Asset turnover ratio= net sales/ average total fixed assets


2014 2015 2016 2017 2018
3.11 3.40 3.87 4.30 4.24
Earning per Share:

Earnings per share (EPS) are a figure describing a public company's profit per outstanding share of stock,
calculated on a quarterly or annual basis.

Earning per share= profit after interest and tax/no. of common shares outstanding
2014 2015 2016 2017 2018
174.85 193.18 261.23 322.86 254.56

Analysis: The high price earnings ratio means that the company has very high profitability, and as shown,
nestle’ has very high price earnings ratio, which means that company is very profitable. The company
with high profits mean, all of their operations are running well.

Dividend per Share:


Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share
outstanding.

Dividend per share= total dividend declared/ no. of outstanding common shares
2014 2015 2016 2017 2018
89.99 49.9 184.9 79.9 75

Analysis:

high dividend per share proves to be good for the company and its shareholders. We can see that DPS is
exceptionally high in 2016 which means that company was most profitable in 2016. However,
profitability is increasing with every passing year.

Dividend payout ratio:

The dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends: The
part of earnings not paid to investors is left for investment to provide for future earnings growth.

Dividend payout ratio= dividend per share/ profit after interest and tax

2014 2015 2016 2017 2018


0.00001 0.000006 0.000015 0.000054 0.0000064

Analysis:

The dividend payout ratio between 35-55% is considered healthy for the company and from
investor’s point of view. A company that is likely to distribute roughly half of its earnings as dividends,
means the company Is well established. According to data, company was doing best in 2017.

Price earnings ratio:

The price-earnings ratio, also known as P/E ratio, P/E, or PER, is the ratio of a company's share price to
the company's earnings per share. The ratio is used for valuing companies and to find out whether they
are overvalued or undervalued

Price earnings ratio= market price per share/ earning per share

2014 2015 2016 2017 2018


600 294 804 320 441

Analysis: A company with high price earnings ratio usually indicates positive future performance and
investors are willing to pay more for this company. According to data, the company was doing very well
in 2016, as compared to rest of the years.

Market to book ratio:

The book-to-market ratio is used to find a company's value by comparing its book value to its market
value

Market to book ratio= market price per share/ book value per share
2014 2015 2016 2017 2018
9 5 18.5 8 7.5

Analysis:

It does not work well for companies with mostly intangible assets. Any value under 1.0 is considered
good market to book ratio. The company has very high market to book ratio. This means that company
has a lot of intangible assets.

Retention ratio:

The retention ratio refers to the percentage of net income that is retained to grow the business, rather
than being paid out as dividends. It is the opposite of the payout ratio, which measures the percentage
of profit paid out to shareholders as dividends.

Retention ratio= 1- dividend payout ratio

2014 2015 2016 2017 2018


0.99999 0.9999944 0.999985 0.9999946 0.9999936

Analysis:

High retention ratio has proven to be good for the company as it refers to the percentage of net income
that is retained to grow the business, rather than being paid out as dividends. The company has almost
same retention ratio
THE END

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