Practical Analysis of Part D4 of Cost Audit Report with Practical Example

 

 

 

The given financial ratios provide an insight into a company's financial performance for the current year as well as the previous year. Let's analyze each of the ratios:

1)     Profitability ratios

PBT to capital employed ratio:

The current year PBT to capital employed ratio is significantly higher (230.71%) than the previous year (-11.85%). This indicates that the company is generating a high level of profit relative to its capital employed. A high ratio suggests that the company is using its capital effectively and generating a good return on investment. However, it's important to note that this ratio can be influenced by the company's debt levels, so it's important to consider the company's overall debt position.

 

PBT to net worth ratio:

The current year PBT to net worth ratio (107.10%) is higher than the previous year (51.23%). This indicates that the company is generating a higher level of profit relative to its net worth, which is a positive sign for investors. It suggests that the company is effectively utilizing its resources to generate profits and may have a stronger financial position than the previous year.

 

PBT to value added ratio:

The current year PBT to value added ratio (34.26%) is significantly higher than the previous year (-8.68%). This indicates that the company is generating a higher level of profit relative to its value added, which is a positive sign for investors. It suggests that the company is efficient in generating profits from its operations and may have improved its cost management or revenue generation strategies.

 

PBT to net revenue from operation ratio:

The current year PBT to net revenue from operation ratio (5.91%) is positive, indicating that the company is generating a profit from its operations. The ratio has also improved significantly from the previous year (-1.16%), indicating that the company's profitability has improved. However, it's important to note that this ratio can be influenced by the company's revenue growth, so it's important to consider the company's overall revenue performance.

 

Overall, the analysis of the given financial ratios suggests that the company has improved its financial performance significantly in the current year compared to the previous year. The company is generating higher profits relative to its capital employed, net worth, value added, and net revenue from operations, which is a positive sign for investors. However, it's important to consider the context and industry norms when interpreting these ratios and to analyze other financial metrics to get a comprehensive understanding of the company's financial performance.

 

2)     Other Financial ratios

Debt to equity ratio:

The current year debt to equity ratio (0.36) is significantly lower than the previous year (-6.37). This indicates that the company's debt levels have decreased, which is a positive sign for investors. It suggests that the company has either paid off its debt or increased its equity, which may improve its financial stability and creditworthiness.

 

Current asset to current liability ratio:

The current year current asset to current liability ratio (0.50) is higher than the previous year (0.44). This indicates that the company has a better ability to meet its short-term obligations with its current assets, which is a positive sign for investors. It suggests that the company has either increased its current assets or decreased its current liabilities, which may improve its liquidity and financial flexibility.

 

Value added to net revenue from operation ratio:

The current year value added to net revenue from operation ratio (17.24%) is higher than the previous year (13.35%). This indicates that the company is generating a higher level of value added relative to its net revenue from operations, which is a positive sign for investors. It suggests that the company is efficient in generating value from its operations and may have improved its cost management or revenue generation strategies.

 

Overall, the analysis of the given financial ratios suggests that the company has improved its financial performance in the current year compared to the previous year. The company has decreased its debt levels, improved its ability to meet short-term obligations with current assets, and generated a higher level of value added relative to its net revenue from operations, which are all positive signs for investors. However, it's important to consider the context and industry norms when interpreting these ratios and to analyze other financial metrics to get a comprehensive understanding of the company's financial performance.

 

 

3)     Working Capital Ratios

 

Raw material stock to consumption ratio:

The current year raw material stock to consumption ratio (1.01) is lower than the previous year (1.10). This indicates that the company has been able to manage its raw material inventory more efficiently, which is a positive sign for investors. It suggests that the company has either reduced its raw material stock or increased its consumption, which may improve its working capital management and reduce the risk of inventory obsolescence or spoilage.

 

Finished goods stock to cost of sales ratio:

The current year finished goods stock to cost of sales ratio (0.01) is the same as the previous year (0.01). This indicates that the company has maintained a similar level of finished goods inventory relative to its cost of sales, which may not have a significant impact on its financial performance. However, it's important to consider the industry norms and demand patterns when analyzing this ratio as it may vary across industries.

 

Overall, the analysis of the given financial ratios suggests that the company has been able to manage its raw material inventory more efficiently in the current year compared to the previous year. This may improve its working capital management and reduce the risk of inventory obsolescence or spoilage, which are positive signs for investors. However, the impact of the finished goods inventory level on the company's financial performance is not significant, and it's important to consider the industry norms and demand patterns when analyzing this ratio.