Wesfarmar Financial Ratios

Financial ratio analysis is a valuable tool that allows one to assess the success, potential failure or future prospects of the company (Bazley 2012). The ratios are helpful in spotting useful trends that can indicate the warning signs of

While financial ratio analysis does contain limitations that include little theory to guide them as well as the use of accounting data based on historical costs that may not reflect a firm’s true economic conditions, it is an excellent tool

The Gross Profit Margin remained stable over this period, which tells us that Wesfarmers has been efficient in the production and distribution of its products. From a management perspective, Wesfarmers should be able to remain profitable as long as the overhead costs are controlled.

Financial ratios are great indicators to find a firm’s performance and financial situation. Most of the ratios are able to be calculated through the use of financial statements provided by the firm itself. They show the relationship between two or more financial variables that can be used to analyze trends and to compare the firm’s financials with other companies to further come up with market values or discount rates, etc.

Understanding financial ratios are critical to understanding if a business is making sound financial decisions as well as helpful in identifying trends over time that can help measure the financial state of a company. Financial ratios also allow a company to run trend analysis which enables the company to see how they have been performing over time as well as allowing for short-term financial plans in order to course correct if necessary. Some of the most common financial ratios are earnings per share, liquidity ratios, debt ratios, return on assets, and return on equity ratios.

Aerts and Walton (2013) expressed ratio analysis as connection between two elements of financial statements. According to them, ratios analysis allows to compare the incomparable elements in different companies. In other words, we may say that comparing profit on its own between two companies would not give a reliable conclusion on organisations’ profitability. If would simply ignore profit relationship with other financial elements like cost of goods, which itself affects the proportion of profit. This is where ratio analysis becomes a useful instrument. It allows us to draw the link between two different sales figures and two different cost of goods figures and eventually makes results comparable between two organisations. Lasher (2014) added that ratios are only valuable as a tool when they are compared with the ratios of other companies. To make investment decisions easier, we will compare industry averages later in the report.

Financial ratios provide a quickly and relatively way of assessing financial situation of an organisation. Ratios could be very helpful when comparing the financial health of different business, and it describes the relationship between different items in financial statement (Elliott & Elliott, 2008). By calculating a relatively small number of ratios, it will build up a good picture of the position and the performance of an organisation. Ration analysis includes five main areas, which are including profitability, efficiency, liquidity, financial gearing and investment (Atrill & Mclaney, 2006).

Examining financial ratios for a particular period of time can be used to identify unusual changes thus alerting the management on the progress of the business venture. Financial ratios are also helpful in carrying out financial analysis and forecasting. They also allow the owner of the business and the entire management to come up with business specific goals that can easily be traced to determine the company’s progress towards achieving them.

Ratio analysis acts as powerful tool in analysing and interpreting the financial statements of a company. Ratios help as to find the relationship between different items appearing in the financial statements of a company. They are also used in examining various aspects of financial position and performance and are widely used for

and Wm Morrison supermarket PLC .It will be focus on following respects (1)Comparing Tesco PLC and Morrison PLC between 2013 and 2014 respectively. (2) Comparing Tesco PLC and Morrison PLC in 2014.

Ratio analysis is a useful tool for analyzing financial statements. Calculating ratios will aid in understanding the company’s strategy and in understanding its strengths and weaknesses relative to other companies and over time. They can sometimes be useful in identifying earnings management and in understanding the effect of accounting choices on the firm’s reported profitability and growth. Finally, the ratios help in obtaining a better understanding of a firm’s current profitability, growth, and risk which can improve forecasts of future profitability and growth and estimates of the cost of capital.

Financial Ratios: What They MeanIn assessing the significance of various financial data, managers often engage in ratio analysis, the process of determining and evaluating financial ratios. A financial ratio is a relationship that indicates something about a company's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and its annual sales. The basic source for these ratios is the company's financial statements that contain figures on assets, liabilities, profits, and losses. Ratios are only meaningful when compared with other information.

Financial ratios provide a means to analyze the operations of a company in comparison to its industry and its historical results.

Firms and Companies include ‘Ratios’ in their external report to which it can be referred as ‘highlights’. Only with the help of ratios the financial statements are meaningful. It is therefore, not surprising that ratio analysis feature are prominently in the literature on financial management. According to Mcleary (1992) ratio means “an expression of a relationship between any two figures or groups of figures in the financial statements of an undertaking”.

Following are the cautions while doing financial analysis. First, a single ratio does not generally provide sufficient information from which to judge the overall performance and status of the firm. Only when a group of ratios is used can reasonable judgments be made. If an analysis is concerned only with certain specific aspects of a firm’s financial position, one or two ratios may be sufficient. Second, It is preferable to use audited financial statements for ratio analysis. If the statements have not been audited, there may be no reason to believe that the data contained in them reflect the firm’s true financial condition. Third, the financial data being compared should have been developed in the same way. The use of differing accounting treatments, especially relative to inventory and depreciation can distort the results. (Whitis and Keith, 1993).