Financial Ratio Analysis Financial Business Performance

Question: Discuss about the Financial Ratio Analysis for Financial Business Performance. Answer: Introduction Financial ratios analysis helps to interpret the financial performance of the company for the period and compare it with performance of other companies. Calculations and explanation to ratios Ratio Calculation Ratios Formula 2015 A Profitability 1 Net Profit Ratio Net Profit/Revenue Telstra 16.37% TPG 17.62% Vocus 13.42% 2 Gross Profit Gross Profit/ Revenue Telstra 73% TPG 100% Vocus 100% 3 Return on Equity Net Profit/Equity Telstra 30.00% TPG 22.33% Vocus 10.20% B Liquidity Ratios 1 Current Ratio Current Assets/Current Liabilities Telstra 0.86 TPG 0.98 Vocus 1.02 2 Quick Ratio Quick Assets/Current Liabilities Telstra 0.75 TPG 0.93 Vocus 0.95 3 Cash Ratio Cash and Cash Equivalent / Current Liabilities Telstra 0.17 TPG 0.68 Vocus 0.38 C Capital Structure 1 Debt Equity Ratio Debt/Equity Telstra 1.29 TPG 0.39 Vocus 0.74 2 Debt Ratio Debt /Total Assets Telstra 0.45 TPG 0.24 Vocus 0.38 3 Interest Coverage Ratio Revenue/Finance Cost Telstra 30.55 TPG 60.52 Vocus 24.83 D Activity Ratios 1 Accounts Receivable Turnover Turnover / Accounts Receivable Telstra 5.47 TPG 19.86 Vocus 6.48 2 Fixed Asset Turnover Turnover/Fixed Asset Telstra 0.77 TPG 0.91 Vocus 0.44 3 Sales to inventory Turnover Turnover / Inventory Telstra 52.64 TPG 211.83 Vocus (Annual Report 2015: Telstra, TPG and Vocus) On interpreting the above table of ratio analysis following conclusions has been drawn for each type of ratios: Liquidity Analysis: On looking at the current ratio and quick ratio of Telstra it can be said that company has poor solvency position as compare to TPG and Vocus. Telstra also fails to keep sufficient cash and cash equivalents to pay the liabilities and on the other hand both TPG and Vocus keep sufficient cash and cash equivalents to render the payment of liabilities smoothly (Mumba, 2013). Profitability Analysis: Net profit ratio shows that TPG has best net profit ratio as compare to Telstra and Vocus. It can be said that Telstra has earned sufficient net profit in year 2015 to earn 30% return on equity, which is highest among all the companies. Capital Structure: On looking at the capital formation of all Telstra and its competitors, it has been found that Telstra relies mostly on debt capital as compare to equity capital. Analysis shows that capital structure of TPG as well as Vocus is very sound as compare to Telstra (Bull, 2007). Activity Ratio: It can be said that Telstra fails to use the assets as per their efficiency because all the activity ratios are not favorable for Telstra as they are highly low as compare to competitors (Houston and Brigham, 2009). Recommendation It has been highly recommended to the investors that they do not invest in the Telstra due to its poor performance in year 2015. Conclusion Interpretation shows that financial performance of Telstra was very weak as compare to their main competitors. Apart from the competitor analysis it can be said that company performance was better as compare to previous year. References Annual Report 2015. Telstra. [Online]. Annual Report 2015. TPG. [Online]. Annual Report 2015. Vocus. [Online]. Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. UK: Elsevier. Houston, J.F. and Brigham, E.F. 2009. Fundamentals of Financial Management. Cengage Learning. Mumba, C. 2013. Understanding Accounting and Finance: Theory and Practice. USA: Trafford Publishing.