Ratio analysis is one of the techniques adopted by almost every company to determine the strength of the company in terms of the financial performance. With the help of the ratio analysis technique the company can evaluate the new strategies if required to improve the performance and the position in the comparison table with the competitors. In this report the ratio analysis of the XAAR PLC has been carried out in detail taking into consideration, almost all ratios. The report is also segregate into the three major sections where in the first section the six important ratios are considered and analyzed. In the second section the implications and the discussion is created on the basis of the section 1. Lastly in the section 3 the working of all the ratios is attached to get a deeper insight of the financial statements and the figures.
This section presents the importance of six major ratios that are of crucial nature and which needs regular revision from the side of the XAAR PLC.
Liquidity ratios
Liquidity ratios are basically calculated to analyze the liquid position of the company. The liquidity of the XAAR can be measured only with the help of these ratios along with the comparison over the period of last year. One such ratio that is critical and is of core importance is the current ratio. The current ratio determines the ability of the company to pay back the current liabilities by realizing the cash from the current assets. As it can be observed from the table the current asset ratio of the XAAR is 5.27 in comparison to the previous year where the value was 5.77.
Gross Profit Margin
The gross profit margin belongs to the category of the profitability ratio which is the most demanding ratio in the list of the entire ratios. The gross profit ratio is the second king of the company as the earnings of the investors are mainly dependent on how much net profit is attributable to the shareholders after the payment of the operating and non-operating expenses. The gross profit margin is steady and the company needs to focus on the maintenance of its consistency. The gross profit was 46% in the year 2016 and it shifted to the year 2017 at 47%.
Leverage Ratio
The leverage ratio is the financial ratio which determines the financial modeling and the accounting. The general approach while calculating these types of the ratios are the fact that it indicates how the assets of the company are financed. The major leverage ratios are the debt to equity ratio or the gearing ratio. The gearing ratio is of the major concern as the gearing ratio has increased from the year 2016 to 2017. Earlier in the year 2016 the ratio was 11.38% whereas the same increased to 13.29%.
Stock turnover days
The inventory turnover ratio is the ratio which belongs to the category of the efficiency ratios and the major focus of the inventory turnover ratio is on how quickly the XAAR PLC realizes the funds by selling the inventory and keeping as minimum as possible in terms of the closing stock. The inventory turnover ratio of the XAAR PLC is 131.43 days in comparison to the previous year where the ability to realize the cash was much smoother at 97.71 days.
PE Ratio
The P/E Ratio is the ratio which indicates the value of the company. It is basically used to determine whether they are overvalued or undervalued. There is multiple version of this ratio and this is due to the fact that sometimes the analysts are interested in the long term valuation trends. Therefore this ratio becomes one of the crucial ratios from the list of the investor’s ratio. Further as can be observed the PE ratio of the year 2016 is 5.57 and that of the year 2017 is 8.83.
Return on Equity
Return on equity is the ratio which belongs to the category of the investor’s ratio. Basically it is driven by three key major factors such as the asset turnover ratio, financial leverage and the profit margin. Therefore the return on equity ratio is also one the crucial ratio to work upon.
This section represents the possible strategies that can improve the ratio and the discussion on how the ratio was implemented based on these trends.
Current Ratio
Though the ideal current ratio is 2:1 and in that sense the company might be performing better, yet too much cash in hand is a reflection of the red flag from the point of view investors as it indicates that the company is not unitizing the current assets efficiently.
Improvement Strategy:
Gross profit margin
The Gross Profit margin is steady because of the control of the cost of the revenue but the major downfall was due to the expenses of the indirect nature. In order to maintain the consistency of the Gross profit ratio some improvements can be taken into consideration.
Improvement Strategy:
Debt to Equity Ratio
The debt to Equity ratio is the ratio which is determines how much capital is funded through the debt and how much capital is funded through the equity. The composition of the two shall be in such a manner that the debt component shall be less than the equity as the over leverage or the overburden will make the company sick.
Improvement strategy
In order to improve the debt to equity ratio are
P/E ratio
There are certain factors which can influence the P/E Ratio of the firm and the same needs a continuous improvement and hence the P/E Ratio requires the serious attention from the side of the company and the steps for the improvement are determined below.
Improvement strategy
Stock turnover days
Inventory turnover ratio of the XAAR PLC is the most crucial part for the organization as it is creating high level of problems. The inventory turnover is increasing due to the underlying stock and lack of demand from the clients and the customers. This is also because there is an inverse relationship between the sales and the inventory. A significant drop results in the increase in the inventory turnover ratio.
Improvement strategy
Return on Equity Ratio
The return on equity is the ratio that determines how much a company can earn with respect to the equity financed. Moreover the return on equity of the XAAR PLC was 10.545 in the year 2016 and 7.43% in the year 2017.
Improvement strategy
The section 3 explains the calculation of all the ratios inclusive of those ratios which have been highlighted in the first section itself. The ratios are categorized and calculated on the basis of their respective formulas for the period of two years that is 2016 as well as 2017.
Workings of the Ratios
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1 – PROFITABILTY |
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Figures used from annual report (GBP ‘000): |
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|
2017 |
2016 |
|
|
Operating income |
£12,290.00 |
£17,853.00 |
|
Sales |
£100,142.00 |
£96,178.00 |
|
Net income |
£10,932.00 |
£14,801.00 |
|
Capital Employed |
£151,226.00 |
£143,330.00 |
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Shareholders’ funds |
£147,184.00 |
£140,456.00 |
|
Long-term debt |
£4,042.00 |
£2,874.00 |
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Return On Sales (ROS in %) = (Operating income/sales) x 100: |
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ROS (2017) = |
(10932/100142) x 100 |
12.27% |
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ROS (2016) = |
(14801/96178) x 100 |
18.56% |
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Asset Utilization Ratio (AUR) = sales/capital employed |
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AUR (2017) = |
(100142/151226) |
0.66 |
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AUR (2016) = |
(96178/143330) |
0.67 |
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Return On Capital Employed |
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ROCE calculated V1 [ROCE (in %) = (net operating income/capital employed) x 100] |
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ROCE (2017) = |
(10932/151226) x 100 |
7.23% |
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ROCE (2016) = |
(14801/143330) x 100 |
10.33% |
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ROCE (2017) = |
(10932/100142) x 100 |
|
|
ROCE (2016) = |
(14801/143330) x 100 |
|
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ROCE calculated V2 [ROCE = ROS x AUR)] |
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ROCE (2017) = |
(12,27% x 0,66) |
8% |
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ROCE (2016) = |
(18,56 % x 0,67) |
12% |
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Gross Profit Margin (?) |
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Gross Profit / Sales |
2017 |
2016 |
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£47,045.00 |
44667.00 |
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£100,142.00 |
96178.00 |
|
|
47% |
46% |
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2 – LIQUIDITY |
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Figures used from annual report (GBP ‘000): |
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2017 |
2016 |
|
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Current Assets |
£97,531.00 |
£87,480.00 |
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Current Liabilities |
£18,524.00 |
£15,157.00 |
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Inventories |
£19,119.00 |
£13,790.00 |
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Current Ratio = current assets/current liabilities: |
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Current Ratio (2017) = |
£97,531.00 |
5.27 |
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£18,524.00 |
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Current Ratio (2016) = |
£87,480.00 |
5.77 |
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£15,157.00 |
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Quick Ratio = (current assets – inventory)/current liabilities |
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Quick Ratio (2017) = |
(97531-19119)/18524 |
4.23 |
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Quick Ratio (2016) = |
(87480-15157)/13790 |
4.86 |
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Working Capital = current assets – current liabilities |
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Working capital (2017) = |
(97531-18524) |
£79,007.00 |
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Working capital (2016) = |
(87480-13790) |
£72,323.00 |
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3 – SOLVENCY |
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Figures used from annual report (GBP ‘000): |
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2017 |
2016 |
|
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Long-term debt |
£4,042.00 |
£2,874.00 |
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Short-term debt |
£18,524.00 |
£15,157.00 |
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Total liabilities |
£22,566.00 |
£18,031.00 |
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Shareholders’ funds |
£147,184.00 |
£140,456.00 |
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Leverage = (short-term debt + long-term debt)/shareholders’ funds |
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Leverage (2017) = |
(18524 + 4042)/147184 |
0.15 |
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Leverage (2016) = |
(15157 + 2874)/140456 |
0.13 |
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Gearing = ((short-term debt + long-term debt)/(short-term debt + long-term debt + shareholders’ funds)) x 100 |
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Gearing (2017) = |
(18524 + 4042)/(18524 + 4042 + 147184) |
13.29% |
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Gearing (2016) = |
(15157 + 2874)/(15157 + 2874 + 140456) |
11.38% |
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Capital Employed = long-term debt + shareholders’ funds |
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Capital Employed (2017) |
(4042 + 147184) |
£151,226.00 |
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Capital Employed (2016) |
(2874 + 140456) |
£143,330.00 |
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4 – OPERATING EFFICIENCY |
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Figures used from annual report (GBP ‘000): |
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|
2016 |
2017 |
|
|
COGS |
£51,511.00 |
£53,097.00 |
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Creditors |
£14,314.00 |
£16,583.00 |
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Stock/Inventories |
£13,790.00 |
£19,119.00 |
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Debtors |
£20,340.00 |
£30,303.00 |
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Creditors days = (creditors/COGS) x 365 days |
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Creditors Days (2016) = |
£101.43 |
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Creditors Days (2017) = |
£114.00 |
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Stock (or inventory) days Stock days = (stock/COGS) x 365 days |
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Stock days (2017) = |
£0.36 |
131.43 |
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Stock days (2016) = |
£0.27 |
97.71 |
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Trade receivables days Debtors days = (debtors/sales) x 365 days |
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Debtors days (2017) |
£0.32 |
209.52 |
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Debtors days (2016) |
£0.20 |
74.14 |
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5 – INVESTOR RATIOS |
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Figures used from annual report (GBP ‘000): |
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2017 |
2016 |
|
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Net profit (for the financial year) |
£10,932.00 |
£14,801.00 |
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Shareholders’ fund |
£147,184.00 |
£140,456.00 |
|
Dividends |
£5,326.00 |
£5,212.00 |
|
Profit for the financial year |
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Debtors |
£16,583.00 |
£14,314.00 |
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EBIT |
£12,290.00 |
£17,853.00 |
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Interest expense |
£0.00 |
£0.00 |
|
Average number of shares (during the accounting period) |
£14,718.00 |
£14,045.00 |
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Market price |
£116.20 |
£108.00 |
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Earnings per share |
£14.30 |
£19.40 |
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Return On Equity ROE (in %) = (Net profit for the financial year/shareholders’ funds) x 100 |
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ROE (2017) = |
7.43% |
7.43% |
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ROE (2016) = |
10.54% |
10.54% |
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Payout Ratio Payout ratio (in %) = (dividens/profit for the financial year) x 100 |
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Payout Ratio (2017) = |
48.72% |
48.72% |
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Payout Ratio (2016) = |
35.21% |
35.21% |
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Earnings Per Share = Net profit for the financial year/average number of shares (during the accounting period) |
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Earnings per share (2017) |
£14.30 |
£14.30 |
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Earnings per share (2016) |
£19.40 |
£19.40 |
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Price/Earnings Ratio P/E ratio = market price/earnings per share |
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P/E ratio (2017) |
£8.13 |
£8.13 |
|
P/E ratio (2016) |
£5.57 |
£5.57 |
Conclusion
From the above analysis it can be concluded that the XAAR PLC needs to keep supervision on following six ratios and the majorly the return on equity and the P/E ratio. P/E Ratio is the driving factor and therefore the improvement strategy as determined above needs to be followed with the immediate effect. Moreover the liquidity ratio also needs the attention and this can be achieved by getting rid of the obsolete assets. Despite this the rest of the categories are also determined in detail above and states that the company can earn better if the strategies are implemented.
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