Violet Chans Consultancy Pty Limited for Ratio - myassignmenthelp

Question: Discuss about theViolet Chans Consultancy Pty Limited for Ratio Analysis. Answer: Introduction Ratio analysis means evaluating the financial performance of the company using the accounting ratios. There are mainly four categories of ratios such as profitability analysis, liquidity analysis, capital structure analysis and market performance analysis. Ratios can be calculated for current accounting period and can be compared with the ratios of previous accounting period. In this report ratio analysis has been conducted of Violet Chan's Consultancy Pty Limited for year 2016. Ratio Analysis This part of report aims to provide the detailed analysis of the various ratios as below: Current Ratio: Current ratio means short term assets that company poses to pay the short term liabilities. The formula to calculate the current ratio is current assets divided by the current liabilities. Current assets are those that can be converted into cash in very short period of time and current liabilities means liabilities that are due in one year time period (Bull, 2007). Current assets: $49,854.00 Current Liabilities: $6,200.00 Current ratio of company: Current assets /Current Liabilities = 8.04 times Current ratio of the company is 8.04 times that indicates that liquidity position is very sound and it has around 8 times the assets to pay the current liabilities. Asset Turnover ratio: This ratio is calculated as total sales divided average total assets. This ratio provides how many times the assets have been used to convert into the sales. This ratio is very important for the management as it provides efficiency of the management to earn the revenue (Bull, 2007). Total sales: $37,812.00 Average total assets: ($47850+ $63,654.00)/2 = $ 55752.00 Asset Turnover ratio: 0.68 times Looking at the ratio result it can be said that company has not able to utilize the assets to earn the maximum sales revenue. So it can be said that efficiency of the company is very weak. Return on Assets: This ratio tells the income earned in percentage on the total value of assets. It is calculated as net income divided by average total assets. This ratio is categories as the profitability ratio as it tells the profitability of the company (Drake and Fabozzi, 2012). Net Income: $5,454.00 Average total assets: ($47850+ $63,654.00)/2 = $ 55752.00 Return on Assets: 9.78% The company has earned the return of 9.78% on the total assets used by the company. It is not the very good percentage but a satisfactory earning on the assets implied for use. Debt to Equity Ratio: This ratio tells the proportion amount of debt and equity that company has to finance various parts of assets. It is calculates as total liabilities divided by total equity (Drake and Fabozzi, 2012). Total Liabilities: $6,200.00 Equity capital: $57,454.00 Debt to equity ratio: 10.79 times Company has very low amount of debt as compare to equity so it can be said that company has very good capital structure. Debt Ratio: It is calculated as debt divided by the total assets. In short it tells amount of debt capital is used to finance the assets of the company. Total assets: $63,654.00 Total Liabilities: $6,200.00 Ratio: 9.74% Company has very short portion of assets financed through the debt capital. Equity Ratio: This ratio tells equity capital used to finance the assets of the company. It is calculated as equity capital divided by the total assets (Drake and Fabozzi, 2012). Total assets: $63,654.00 Equity capital: $57,454.00 Equity Ratio: 90.26% Company has very good ratio that shows company depends mainly on owners capital not on the debt source of capital. Conclusion Violet Chan's Consultancy Pty Limited has very strong financial position in year 2016 and there is huge scope of better earnings in future years. References Bull, R. 2007. Financial Ratios: How to use financial ratios to maximize value and success for your businesses. Elsevier. Drake, P. P. and Fabozzi, F. J. 2012. Analysis of Financial Statements. John Wiley Sons.