Profitability and Financial Stability Reef Ltd

Question: The following information has been extracted from the financial statement and notes of Reef Ltd: 2017 2016 Service revenue $580,000 $575,000 Interest expense $23,000 $26,500 Income tax expense $44,600 $53,000 Profit $52,500 $56,100 Preference dividends $2,800 $2,800 Total assets $540,000 $555,000 Total liabilities $300,000 $330,000 Preference share capital $62,000 $62,000 Ordinary share capital $110,000 $100,000 Retained earnings $68,000 $63,000 Required: Evaluate the company's profitability and financial stability by calculating and analysing the re ratio(s). Answer: Measurement of Profitability and Financial Stability through ratios Ratios 2017 2016 Gross Profit Margin 20.71 23.58 Net Profit Margin 9.05 9.76 Return on Assets 9.72 10.11 Return on Net Worth 45.18 53.30 Debt to Asset Ratio 0.55 0.59 Gross Profit Margin shows the efficiency of the firm. More the gross margin means more in efficient in operation. It can be observed that the gross profit margin of the organization is low and also the gross profit margin of 2017 is less than 2016. Also the net profit margin of the company is very low. The net profit margin of 2017 less than 2016. Return on Assets implies the income generated in respect of total asset. It is observed that the return on assets of the organization is not in good position also it has decreased from 2016 to 2017. Return on net worth means the income generated in respect of equity fund. It is near to 50%. So, it is in average position but it has also decreased from 2016 to 2017. It is observed that, debt to asset ratio has declined from 2016 to 2017. In overall, it can be said the financial position of the company is not so good and financial position of 2016 is good from 2017. Benefits of Ratio Analysis i) Ratio Analysis is one of the important tools of financial analysis. It helps to understand the financial position of an organization.ii) The efficiency of the company can be judged by the ratios. Ratios show how well the assets could be utilized and could earn profits.iii) Different companies can be compared with each other through the ratios.iv) Trend analysis can also be done through ratios. Trend analysis is the judging of a company over the period.v) It helps to find out the weakness area in operations. Limitation of Ratio Analysis 1. Ratio analysis is done to find out the relationship using past information and business is now concerned current and future trend.2. All the companies in industries are not same. They operate in different economic environment such as rules and regulation, structure of market, etc. Ratio analysis does not include those factors. References List Bragg, S. (2000)Financial analysis, New York: Wiley. Chesnick, D. (n.d.)Financial management and ratio analysis for cooperative enterprises. Moy, R. (2000)An analysis of the position and status of sound ratio in contemporary society, Lewiston, N.Y.: Edwin Mellen Press. Rodgers, P. (2008)Financial analysis, Oxford: CIMA. Velez-Pareja, I. (n.d.) Financial Analysis and Control - Financial Ratio Analysis (Slides),SSRN Journal.