OUbs045 BSc (Hons) Digital Marketing

Fundamentals of Finance

ASSIGNMENT: Ratio Analysis

Name: DUMAN-MOOSUDDEE Bibi Amreen

Sudent ID: 202206453

Instructor: Dr. Drishta Tengur

Table of Contents
Abstract ........................................................................................................................... 3
Introduction ..................................................................................................................... 3
Ratio Analysis
Current Ratio............................................................................................................................4
Quick Ratio...............................................................................................................................5
Inventory to Working Capital...................................................................................................6
Debt to Equity Ratio.................................................................................................................7
Capital Gearing Ratio...............................................................................................................7
Current Assets to Fixed Assets.................................................................................................8

Bibliography ..................................................................................................................... 9

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Abstract
The purpose of this assignment is to calculate and comment on the financial
ratios of the Company’s balance sheet provided as at 31st July 2022.

Introduction
Ratio analysis includes comparing two numbers from a company's financial
records to one another to create a figure that is simple to understand and can
be compared to past years and to companies of various sizes. Ratio analysis is
typically used by stakeholders with business experience to assess an entity's
performance in relation to both historical performance and market competitors.
(Andrew Thomas & Anne Marie Ward, 2019)

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i. Current Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current ratio = =x:1
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
200+100+10+40
= :1
100+50
350
= :1
150
= 2.3 : 1

Current ratio is calculated to provide insight into the company's ability to pay
its bills now and in the near future. the company’s current ratio is 2.3:1,
which means that the company has £ 2.3 of assets to cover every £ 1.0 in
liabilities.

The rule of thumb for current ratio is 2:1, which means that the company is
in a desirable situation to pay off its liabilities as at 31 July 2022. However, a
ratio greater that 2 :1 indicates that the business has much idle resources
which can be invested to accumulate other income.

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ii. Quick Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠−𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Quick Ratio = =x:1
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
350−200
= :1
150
=1:1

The Quick ratio, commonly referred to as the acid-test ratio, is a financial

ratio that assesses liquidity by utilising the more liquid categories of current
assets. The sole difference between its calculation and the current ratio's is
the exclusion of inventories and prepayments.

The ideal quick ratio is 1 or greater. The company has a quick ratio of 1 : 1
which implies that the business is healthy and can pay off its liabilities as at
31 July 2022.

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iii. Inventory to Working capital
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Inventory to working capital =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠−𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
200
= :1
350−150
=1:1

A liquidity ratio called the inventory to working capital ratio calculates how
much working capital is held up in inventory.

Any business should keep an eye on this ratio since it provides insight into
how effectively its operations are running. If their working capital is too
heavily invested in inventory, they won't have enough cash on hand to cover
their short-term liabilities.

A value of 1 or less indicates that the company is very liquid in terms of its
current assets and that it has sufficient cash not to rush selling its inventory.

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iv. Debt to Equity Ratio
𝑁𝑜𝑛−𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Debt to equity ratio = =x:1
𝑇𝑜𝑡𝑎𝑙 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′𝑠 𝑒𝑞𝑢𝑖𝑡𝑦
420
= :1
200+30+40
= 1.56 : 1

The debt to equity ratio measures the proportion of finance that is

provided to the company by those other than the ordinary
shareholders. A ratio of 1.56:1 means that the larger proportion of the
company's finance is from non-current liabilities and this also means
that a large slice of profit is paid to lenders of fixed cost capital rather
than ordinary shareholders. Risk arises if profits fall and fail to cover
interest.

v. Capital Gearing Ratio

𝐿𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑙𝑜𝑎𝑛𝑠
Capital gearing ratio = x 100
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
420
= x 100
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠−𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
420
= x 100
840−(100+50)

= 60.9 %

The gearing ratio calculates how much of a company's equity is made

up of borrowed money (AccountingTools). A gearing ratio of 60.9%
means that the company Is highly geared and is a bit overdependent
on outside finance providers.

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vi. Current Assets to Fixed Assets
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current assets to fixed assets = = x:1
𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
350
= :1
490
= 0.71 : 1

Current assets to fixed assets ratio is calculated to analyse whether the

investment in fixed assets is efficient in increasing the current asset of
the business. For example, is investment in fixed assets results in
increase in trade receivables or cash and cash equivalents. The higher
the ratio, the better it is for the business.

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Bibliography
1. Andrew Thomas & Anne Marie Ward, 2019, Introduction to Financial
Accounting, Ninth Edition, McGraw-Hill Education (UK).
2. Investopedia, Corporate Finance, Financial Ratios. Available from
< https://www.investopedia.com/financial-ratios-4689817>
3. AccountingTools, 2022, Gearing ratio definition. Available from
< https://www.accountingtools.com/articles/gearing-ratio>