Business Ratio Analysis Companies Performances

Question: Describe about the Business Ratio Analysis for Companies Performances. Answer: Ratio Analysis The Ratio Analysis is a type of financial statement analysis that is conducted in order to obtain indication of the performance of the company. Importance of Ratios The importances of ratio analysis are: It is helpful in Planning and forecasting; It gives meaning to the absolute figure; It acts as an important basis for decision making; It is helpful in comparing results and evaluating performance; Categories of Ratios There are several categories of ratios that emphasis a particular areas of the business. The ratios are given below: Solvency ratio; Profitability Ratio; Liquidity Ratio; Activity Ratio; Types of Ratio Analysis The ratio analysis can be conducted under various categories. The common categories of ratio analysis are: Analysis of ratio based on the industry; Analysis of ratios based on the department; Analysis of ratios between companies; Analysis of ratios based on period; Analysis of ratios based on the company; Analysis of ratios based on the geographical location; Analysis of ratios based on the age of the company; Key Ratios In this report, Ratio analysis of Westfield Corporation Limited is conducted and the result is compared with the industry standard. The four key ratios of Westfield Corporation that are computed in order to analyze the financial performance are: Net Profit Margin Ratio Return on Equity Dividend Yield Ratio EPS growth rate Net Profit Margin The Net Profit margin indicates the amount of the companys revenue that is converted into net income. This ratio is very popularly used for evaluating the operating efficiency of the company. The Formula of Net Profit Margin is: Net Profit Margin= Net Income/ Sales Revenue The calculation of Net Profit margin of the Westfield Corporation is given below: Calculation of Net Profit Margin Particulars 2013 2014 2015 Net Profit $ 1,621.30 $ (215.00) $ 2,323.50 Total Revenue $ 2,385.10 $ 818.60 $ 1,232.90 Net profit Margin 68% -26% 188% In 2013 and 2015, the company has seen unusually high profit margin due to revaluation of property. In 2014, the revaluation profit was not as high and the company saw low revenue during that year. Return on Equity The Return on Equity is the profitability ratios that measures the ability of the business to generate profit. The Formula of calculating the return on Equity is given below: Return on Equity= Net Income / Shareholders Equity The Return on Equity of Westfield Corporation Limited is calculated below: Calculation of Return on Equity Particulars 2013 2014 2015 Net profit $ 1,621.30 $ (215.00) $ 2,323.50 Share Holders Equity $ 2,234.80 $ 7,733.80 $ 9,229.80 Return On Equity 73% -3% 25% The return on equity is calculated to measure the efficiency with which the funds of the shareholders are used to earn profit. The return on equity of the company was 73% in 2013 then the performance has fallen in 2014. In 2015 the company has managed to improve the performance and the ROE has become 25%. Dividend Yield Ratio The Dividend Yield ratio measures the dividend that is paid to the shareholders in relative to the market value of shares (Healy Palepu 2012). It is useful in analyzing the return that is expected from the stock. The formula for calculating the Dividend Yield Ratio is: Dividend Yield= Dividend per share/ Market Value per share The calculation showing the dividend yield ratio of the Westfield Corporation is given below: Calculation Showing Dividend Yield Ratio Particulars 2013 2014 2015 Dividend per share $ 25.50 $ 12.30 $ 12.55 Market Value of share $ 7.46 $ 7.34 $ 8.40 Dividend Yield Ratio 3.42 1.68 1.49 If there is high, dividend yield ratio that means the company is paying high dividend to its shareholders. The dividend yield ratio of the company indicates that there is a decreasing trend of the distributing ratio of the company. Earnings Per share Growth ratio This ratio indicates the growth in earning over the period. It is useful to identify the stock with the increasing or decreasing profitability (Brigham Ehrhardt 2013). The formula is given below: Earnings Per share growth= (EPS of the year/ EPS of the last year)-1 The calculation of EPS growth is given below: Calculation of EPS Growth Ratio Particulars 2013 2014 2015 EPS of this Year $ 0.20 $ (0.12) $ 1.11 EPS Growth Rate -65% -160% 825% The EPS Growth of the company has decreased in 2013 and 2014. The situation has improved in 2015 and the EPS Growth rate is 825%. Comparison with the Industry The key ratios of the company have been compared with the industry standard so that the position of the company could be analyzed. The table showing the comparison with the industry is given below: Comparison with the Industry Standard Particulars Average of the company Industry Average Net Profit Margin 32% 5% Return on Equity 77% 25% Dividend Yield Ratio 2.20 5.81 EPS Growth Ratio 200% 150% The comparison shows that the company is out performing all the key ratios except the dividend yield ratio. Therefore it can be concluded that the company is performing reasonably well. Reference Healy, P. M., Palepu, K. G. (2012).Business Analysis Valuation: Using Financial Statements. Cengage Learning. Brigham, E. F., Ehrhardt, M. C. (2013).Financial management: Theory practice. Cengage Learning.