conclusion of ratio analysis essay

Ratio Analysis

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 02, 2023

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Table of Contents

Ratio analysis: definitions.

The term ratio analysis is used to refer to the investigation of the quantitative relationships between two variables. Financial experts use these ratios as tools for evaluating different financial statements .

Definitions of Ratio

Notable definitions of ratio are given below:

Robert Anthony: "A ratio is simply one number expressed in terms of another."

Wixon, Kell, and Bedford: "A ratio is the expression of the quantitative relationship between two numbers."

Kohler: "A ratio is a relationship of one amount (A) to another amount (B)."

The important point to note is that ratio analysis does not add anything new but makes a statement more meaningful and helps in drawing the conclusion.

To clarify the concept of ratio analysis, let's consider an example.

Knowing only that a business has earned $2,000,000 in profit does not tell us much. However, when profit is considered in relation to sales (e.g., sales of $5,000,000), this gives some meaning as:

(Profit x 100) / Sales = ($20,00,000 x 100) / $50,00,000 = 40%

So, $100 in sales translates into $40 in the form of profit.

As this example shows, ratios are used to gain insight into a firm's financial position (e.g., whether it is strong or weak). Ratio analysis, more generally, seeks to cover four broad points:

(a) Selection of representative figures. From financial statements, select only those figures that are associated with each other.

(b) Calculation of ratios. Ratios can be calculated as percentages or times or propositions.

(c) Comparison. The main object of ratio analysis is to establish relationships between related values (e.g., the ratio of gross profit to sales or the debt-to-equity ratio .

(d) Interpretation of ratios. Ratios do not convey meaning unless they are analyzed and interpreted effectively.

Importance, Significance, and Merits of Ratio Analysis

The main points of importance are as follows:

1. Test of solvency. Ratios can illuminate the solvency of a firm. For example, when the ratio of current assets to current liabilities is increasing, this indicates sufficient working capital . Thus, creditors can be paid easily.

2. Helpful in decision-making. The main aim of financial statements is to inform users about the financial position of the company, as well as to serve as a decision-making aid for managerial personnel.

3. Helpful in financial forecasting and planning. Ratios are critical in financial planning and forecasting. For example, if a firm's current ratio is 5:1, this means that capital is blocked up. As the ideal ratio is 2:1, we have 5:1, meaning that $3 is unnecessarily blocked.

4. Useful in discovering profitability. Ratios are also useful when comparing the profitability of different companies. Present and past ratios can be compared, for example, to discover trends in the historical and future performance of companies.

5. Liquidity position. With the use of ratio analysis, meaningful conclusions can be obtained about the sound liquidity position of the firm. A firm's liquidity position is sound if it can pay its debts when these are due for payments.

6. Useful for operating efficiency. From a management perspective, ratios enable managers to measure the efficiency of assets . When sales and their contribution to net profit increase every year, this is a test of higher efficiency.

7. Business trends. Ratio analysis can expose trends that managers may use to take corrective actions.

8. Helpful in cost control. Ratios are useful to measure performance and facilitate cost control.

9. Helpful in analyzing corporate financial health. Ratio analysis can provide information about liquidity , solvency, profitability, and capital gearing. Thus, they are valuable for learning about financial health.

Limitations of Ratio Analysis

Although ratios are useful tools, they should be used with the utmost care. This is because they can suffer from drawbacks and limitations, including:

1. Need for technical knowledge. Ratios are quantitative and not qualitative indicators. Thus, to use them, one needs some knowledge of quantitative analysis.

2. Lack of reliable data . When figures are incorrect (e.g., value of closing stock is overstated), ratios will give misleading results.

3. Different basis. Different methods are available for the valuation of closing stock: LIFO and FIFO . In both, profit will differ. Similarly, profit has different meanings.

For example, some companies may take profit before tax and interest , while others may take profit after tax and interest. Similarly, different methods of depreciation will show different amounts of profit.

4. Different accounting policies. Different firms follow different policies with regard to depreciation (e.g., fixed installments or diminishing balance method , or stock valuation). Therefore, unless adjustments for profit are made, profit will not be comparable.

5. Effect of price level change . When ratios are calculated, no thought is given to inflationary measures that are responsible for changes in price. Thus, the utility of ratio analysis becomes questionable in these cases.

6. Bias. Ratios are only tools. They depend on the user for practical shape. For example, profit has different meanings, including EBIT (earnings before interest and taxes) . Thus, personal opinion differs from business to business.

7. Lack of comparison. Different firms adopt different procedures, records, objectives, and policies. Due to this, comparisons become complex.

8. Evaluation. There are different tools for ratio analysis. The question of which tool to use in a particular situation depends upon the skill, training, knowledge, and expertise of the analyst.

Ratio Analysis FAQs

What is a ratio analysis.

The term ratio analysis is used to refer to the investigation of the quantitative relationships between two variables. Financial experts use these ratios as tools for evaluating different Financial Statements.

What is a ratio?

Notable definitions of ratio are given below:robert anthony: ” a ratio is simply one number expressed in terms of another.”Wixon, kell, and bedford: “a ratio is the expression of the quantitative relationship between two numbers.”Kohler: “a ratio is a relationship of one amount (a) to another amount (b).”The important point to note is that ratio analysis does not add anything new but makes a statement more meaningful and helps in drawing the conclusion.

What does a ratio analysis measure?

Ratio analysis seeks to cover four broad points:1. Selection of representative figures2. Calculation of ratios3. Comparison4. Interpretation of ratios

What is the importance of ratio analysis?

The main points of importance are as follows:1. Test of solvency2. Helpful in decision-making3. Helpful in financial forecasting and planning4. Useful in discovering profitability5. Liquidity position6. Useful for operating efficiency7. Business trends8. Helpful in cost control9. Helpful in analyzing corporate financial health

Although ratios are useful tools, they should be used with the utmost care. This is because they can suffer from drawbacks and limitations, including:1. Need for technical knowledge2. Lack of reliable data3. Different basis4. Different accounting policies5. Effect of price level change6. Bias7. Lack of comparison8. Evaluation

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Financial Ratio Analysis Tutorial With Examples

The Balance Sheet for Financial Ratio Analysis

The income statement for financial ratio analysis, analyzing the liquidity ratios, the current ratio, the quick ratio, analyzing the asset management ratios accounts receivable, receivables turnover, average collection period, inventory, fixed assets, total assets, inventory turnover ratio, fixed asset turnover, total asset turnover, analyzing the debt management ratios, debt-to-asset ratio, times interest earned ratio, fixed charge coverage, analyzing the profitability ratios, net profit margin, return on assets, return on equity, financial ratio analysis of xyz corporation.

While it may be more fun to work on marketing efforts, the financial management of a firm is a crucial aspect of owning a business. Financial ratios help break down complex financial information into key details and relationships. Financial ratio analysis involves studying these ratios to learn about the company's financial health.

Here are a few of the most important financial ratios for business owners to learn, what they tell you about the company's financial statements, and how to use them.

Key Takeaways

• Some of the most important financial ratios for business owners include the current ratio, the inventory turnover ratio, and the debt-to-asset ratio.
• These financial ratios quickly break down the complex information from financial statements .
• Financial ratios are snapshots, so it's important to compare the information to previous periods of data as well as competitors in the industry.

Here is the balance sheet we are going to use for our financial ratio tutorial. You will notice there are two years of data for this company so we can do a time-series (or trend) analysis and see how the firm is doing across time.

Here is the complete income statement for the firm for which we are doing financial ratio analysis. We are doing two years of financial ratio analysis for the firm so we can compare them.

Refer back to the income statement and balance sheet as you work through the tutorial.

The first ratios to use to start getting a financial picture of your firm measure your liquidity, or your ability to convert your current assets to cash quickly. They are two of the 13 ratios. Let's look at the current ratio and the quick (acid-test) ratio .

The current ratio measures how many times you can cover your current liabilities. The quick ratio measures how many times you can cover your current liabilities without selling any inventory and so is a more stringent measure of liquidity.

Remember that we are doing a time series analysis, so we will be calculating the ratios for each year.

Current Ratio : For 2022, take the Total Current Assets and divide them by the Total Current Liabilities. You will have: Current Ratio = 642/543 = 1.18X. This means that the company can pay for its current liabilities 1.18 times over. Practice calculating the current ratio for 2023.

Your answer for 2023 should be 1.31X. A quick analysis of the current ratio will tell you that the company's liquidity has gotten just a little bit better between 2022 and 2023 since it rose from 1.18X to 1.31X.

Quick Ratio : In order to calculate the quick ratio, take the Total Current Ratio for 2022 and subtract out Inventory. Divide the result by Total Current Liabilities. You will have: Quick Ratio = (642-393)/543 = 0.46X. For 2023, the answer is 0.52X.

Like the current ratio, the quick ratio is rising and is a little better in 2023 than in 2022. The firm's liquidity is getting a little better. The problem for this company, however, is that they have to sell inventory to pay their short-term liabilities and that is not a good position for any firm to be in. This is true in both 2022 and 2023.

This firm has two sources of current liabilities: accounts payable and notes payable. They have bills that they owe to their suppliers (accounts payable) plus they apparently have a bank loan or a loan from some alternative source of financing. We don't know how often they have to make a payment on the note.

Asset management ratios are the next group of financial ratios that should be analyzed. They tell the business owner how efficiently they employ their assets to generate sales. Assume all sales are on credit.

• Receivables Turnover = Credit Sales/Accounts Receivable
• Receivables Turnover = 2,311/165 = 14X

A receivables turnover of 14X in 2022 means that all accounts receivable are cleaned up (paid off) 14 times during the 2022 year. For 2023, the receivables turnover is 15.28X. Look at 2022 and 2023 Sales in The Income Statement and Accounts Receivable in The Balance Sheet.

The receivables turnover is rising from 2022 to 2023. We can't tell if this is good or bad. We would really need to know what type of industry this firm is in and get some industry data to compare to.

Customers paying off receivables is, of course, good. But, if the receivables turnover is way above the industry's, then the firm's credit policy may be too restrictive.

The average collection period is also about accounts receivable. It is the number of days, on average, that it takes a firm's customers to pay their credit accounts. Together with receivables turnover, the average collection helps the firm develop its credit and collections policy.

• Average Collection Period = Accounts Receivable/Average Daily Credit Sales
• To arrive at average daily credit sales, take credit sales and divide by 360
• Average Collection Period = $165/2,311/360 = $165/6.42 = 25.7 days
• In 2023, the average collection period is 23.5 days

From 2022 to 2023, the average collection period is dropping. In other words, customers are paying their bills more quickly. Compare that to the receivables turnover ratio. Receivables turnover is rising and the average collection period is falling.

This makes sense because customers are paying their bills faster. The company needs to compare these two ratios to industry averages. In addition, the company should take a look at its credit and collections policies to be sure they are not too restrictive. Take a look at the image above and you can see where the numbers came from on the balance sheets and income statements.

Along with the accounts receivable ratios that we analyzed above, we also have to analyze how efficiently we generate sales with our other assets: inventory, plant and equipment, and our total asset base.

The inventory turnover ratio is one of the most important ratios a business owner can calculate and analyze. If your business sells products as opposed to services, then inventory is an important part of your equation for success.

Inventory Turnover = Sales/Inventory

If your inventory turnover is rising, that means you are selling your products faster. If it is falling, you are in danger of holding obsolete inventory. A business owner has to find the optimal inventory turnover ratio where the ratio is not too high and there are no stockouts or too low where there is obsolete money. Both are costly to the firm.

For this company, their inventory turnover ratio for 2022 is:

Inventory Turnover Ratio = Sales/Inventory = 2,311/393 = 5.9X

This means that this company completely sells and replaces its inventory 5.9 times every year. In 2023, the inventory turnover ratio is 6.8X. The firm's inventory turnover is rising. This is good in that they are selling more products. The business owner should compare the inventory turnover with the inventory turnover ratio of other firms in the same industry.

The fixed asset turnover ratio analyzes how well a business uses its plant and equipment to generate sales. A business firm does not want to have either too little or too much plant and equipment. For this firm for 2022:

Fixed Asset Turnover = Sales/Fixed Assets = 2,311/2,731 = 0.85X

For 2023, the fixed asset turnover is 1.00. The fixed asset turnover ratio is dragging down this company. They are not using their plant and equipment efficiently to generate sales as, in both years, fixed asset turnover is very low.

The total asset turnover ratio sums up all the other asset management ratios. If there are problems with any of the other total assets, it will show up here, in the total asset turnover ratio.

Total Asset Turnover = Sales/Total Asset Turnover = Sales/Total Assets = 2,311/3,373 = 0.69X for 2022. For 2023, the total asset turnover is 0.80. The total asset turnover ratio is somewhat concerning since it was not even 1X for either year.

This means that it was not very efficient. In other words, the total asset base was not very efficient in generating sales for this firm in 2022 or 2023. Why?

It seems that most of the problem lies in the firm's fixed assets. They have too much plant and equipment for their level of sales. They either need to find a way to increase their sales or sell off some of their plant and equipment. The fixed asset turnover ratio is dragging down the total asset turnover ratio and the firm's asset management in general.

There are three debt management ratios that help a business owner evaluate the company in light of its asset base and earning power. Those ratios are the debt-to-asset ratio, the times interest earned ratio , and the fixed charge coverage ratios. Other debt management ratios exist, but these help give business owners the first look at the debt position of the company and the prudence of that debt position.

The first debt ratio that is important for the business owner to understand is the debt-to-asset ratio ; in other words, how much of the total asset base of the firm is financed using debt financing. For example. the debt-to-asset ratio for 2022 is:

Total Liabilities/Total Assets = $1,074/3,373 = 31.8%. This means that 31.8% of the firm's assets are financed with debt. In 2023, the debt ratio is 27.8%. In 2023, the business is using more equity financing than debt financing to operate the company.

We don't know if this is good or bad since we do not know the debt-to-asset ratio for firms in this company's industry. However, we do know that the company has a problem with its fixed asset ratio which may be affecting the debt-to-asset ratio.

The times interest earned ratio tells a company how many times over a firm can pay the interest that it owes. Usually, the more times a firm can pay its interest expense the better. The times interest earned ratio for this firm for 2022 is:

• Times Interest Earned = Earnings Before Interest and Taxes/Interest = 276/141 = 1.96X
• For 2023, the times interest earned ratio is 3.35

The times interest earned ratio is very low in 2022 but better in 2023. This is because the debt-to-asset ratio dropped in 2023.

The fixed charge coverage ratio is very helpful for any company that has any fixed expenses they have to pay. One fixed charge (expense) is interest payments on debt, but that is covered by the times interest earned ratio.

Another fixed charge would be lease payments if the company leases any equipment, a building, land, or anything of that nature. Larger companies have other fixed charges which can be taken into account.

• Fixed charge coverage = Earnings Before Fixed Charges and Taxes/Fixed Charges

In both 2022 and 2023 for the company in our example, its only fixed charge is interest payments. So, the fixed charge coverage ratio and the times interest earned ratio would be exactly the same for each year for each ratio.

The last group of financial ratios that business owners usually tackle are the profitability ratios as they are the summary ratios of the 13 ratio group. They tell the business firm how they are doing on cost control, efficient use of assets, and debt management, which are three crucial areas of the business.

The net profit margin measures how much each dollar of sales contributes to profit and how much is used to pay expenses. For example, if a company has a net profit margin of 5%, this means that 5 cents of every sales dollar it takes in goes to profit and 95 cents goes to expenses. For 2022, here is XYZ, Inc.'s net profit margin:

Net Profit Margin = Net Income/Sales Revenue = 89.1/2,311 = 3.9%

For 2023, the net profit margin is 6.5%, so there was quite an increase in their net profit margin. You can see that their sales took quite a jump but their cost of goods sold rose. It is the best of both worlds when sales rise and costs fall. Bear in mind: The company can still have problems even if this is the case.

The return on assets ratio, also called return on investment , relates to the firm's asset base and what kind of return they are getting on their investment in their assets. Look at the total asset turnover ratio and the return on asset ratio together. If total asset turnover is low, the return on assets is going to be low because the company is not efficiently using its assets.

Another way to look at the return on assets is in the context of the Dupont method of financial analysis. This method of analysis shows you how to look at the return on assets in the context of both the net profit margin and the total asset turnover ratio.

• To calculate the Return on Assets ratio for XYZ, Inc. for 2022, here's the formula:
• Return on Assets = Net Income/Total Assets = 2.6%

For 2023, the ROA is 5.2%. The increased return on assets in 2023 reflects the increased sales and much higher net income for that year.

The return on equity ratio is the one of most interest to the shareholders or investors in the firm. This ratio tells the business owner and the investors how much income per dollar of their investment the business is earning. This ratio can also be analyzed by using the Dupont method of financial ratio analysis. The company's return on equity for 2022 was:

Return on Equity = Net Income/Shareholder's Equity = 3.9%

For 2023, the return on equity was 7.2%. One reason for the increased return on equity was the increase in net income. When analyzing the return on equity ratio, the business owner also has to take into consideration how much of the firm is financed using debt and how much of the firm is financed using equity.

Now we have a summary of all 13 financial ratios for XYZ Corporation. The first thing that jumps out is the low liquidity of the company. We can look at the current and quick ratios for 2022 and 2023 and see that the liquidity is slightly increasing between 2022 and 2023, but it is still very low.

By looking at the quick ratio for both years, we can see that this company has to sell inventory in order to pay off short-term debt. The company does have short-term debt: accounts payable and notes payable, and we don't know when the notes payable will come due.

Let's move on to the asset management ratios. We can see that the firm's credit and collections policies might be a little restrictive by looking at the high receivable turnover and low average collection period. Customers must pay this company rapidly—perhaps too rapidly. There is nothing particularly remarkable about the inventory turnover ratio, but the fixed asset turnover ratio is remarkable.

The fixed asset turnover ratio measures the company's ability to generate sales from its fixed assets or plant and equipment. This ratio is very low for both 2022 and 2023. This means that XYZ has a lot of plant and equipment that is unproductive.

It is not being used efficiently to generate sales for the company. In addition, the company has to service the plant and equipment, pay for breakdowns, and perhaps pay interest on loans to buy it through long-term debt.

It seems that a very low fixed asset turnover ratio might be a major source of problems for XYZ. The company should sell some of this unproductive plant and equipment, keeping only what is absolutely necessary to produce their product.

The low fixed asset turnover ratio is dragging down total asset turnover. If you follow this analysis through, you will see that it is also substantially lowering this firm's return on assets profitability ratio.

With this firm, it is hard to analyze the company's debt management ratios without industry data. We don't know if XYZ is a manufacturing firm or a different type of firm.

As a result, analyzing the debt-to-asset ratio is difficult. What we can see, however, is that the company is financed more with shareholder funds (equity) than it is with debt as the debt-to-asset ratio for both years is under 50% and dropping.

This fact means that the return on equity profitability ratio will be lower than if the firm was financed more with debt than with equity. On the other hand, the risk of bankruptcy will also be lower.

Unfortunately, you can see from the times interest earned ratio that the company does not have enough liquidity to be comfortable servicing its debt. The company's costs are high and liquidity is low. Fortunately, the company's net profit margin is increasing because their sales are increasing.

Hopefully, this is a trend that will continue. Return on Assets is impacted negatively due to the low fixed asset turnover ratio and, to some extent, by the receivables ratios. Return on equity is increasing from 2022 to 2023, which will make investors happy.

As you can see, it is possible to do a cursory financial ratio analysis of a business firm with only 13 financial ratios, even though ratio analysis has inherent limitations.

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.2 Operating Efficiency Ratios ." OpenStax.

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 2, 4.

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 3, 6.

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.4 Solvency Ratios ." OpenStax.

Nasdaq. " Fixed-Charge Coverage Ratio ."

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 3, 5.

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.6 Profitability Ratios and the DuPont Method ." OpenStax.

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What Is Ratio Analysis?

Net profit margin, price-to-earnings ratio (p/e), other factors to consider.

• Ratio Analysis FAQs
• Corporate Finance
• Financial Ratios

How to Use Ratio Analysis to Compare Companies

Ratio analysis helps investors compare companies' financial performance

When investors wish to compare the financial performance of different companies, a highly valuable tool at their disposal is ratio analysis . Ratio analysis can provide insight into companies' relative financial health and future prospects. It can yield data about profitability, liquidity, earnings, extended viability, and more. The results of such comparisons can mean more powerful decision-making when it comes to selecting companies in which to invest.

It's important that investors understand that a single ratio from just one company can't give them a reliable idea of a company's current performance or potential for future financial success. Use a variety of ratios to analyze financial information from various companies that interest you in order to make investment decisions.

Key Takeaways

• Ratio analysis is a method of analyzing a company's financial statements or line items within financial statements.
• Many ratios are available, but some, like the price-to-earnings ratio and the net profit margin, are used more frequently by investors and analysts.
• The price-to-earnings ratio compares a company's share price to its earnings per share.
• Net profit margin compares net income to revenues.
• It's useful to compare various ratios of different companies over time for a reliable view of current and potential future financial performance.

Ratio analysis is the analysis of financial information found in a company's financial statements . Such analysis can shed light on financial aspects that include risk, reward (profitability), solvency, and how well a company operates . As a tool for investors, ratio analysis can simplify the process of comparing the financial information of multiple companies.

There are five basic types of financial ratios :

• Profitability ratios (e.g., net profit margin and return on shareholders' equity)
• Liquidity ratios (e.g., working capital)
• Debt or leverage ratios (e.g., debt-to-equity and debt-to-asset ratios)
• Operations ratios (e.g., inventory turnover)
• Market ratios (e.g. earnings per share (EPS))

Some key ratios that investors use are the net profit margin and price-to-earnings (P/E) ratios.

Net profit margin, often referred to simply as profit margin or the bottom line, is a ratio that investors use to compare the profitability of companies within the same sector. It measures the amount of net profit (gross profit minus expenses) earned from sales. It's calculated by dividing a company's net income by its revenues.

Instead of dissecting financial statements to compare how profitable companies are, an investor can use this ratio instead. For example, suppose company ABC and company DEF are in the same sector. They have profit margins of 50% and 10%, respectively. An investor can easily compare the two companies and conclude that ABC converted 50% of its revenues into profits, while DEF only converted 10%.

Another ratio that can help when comparing companies is the company's gross profit divided by its operating expenses . By not deducting taxes, you can compare two businesses that might pay different state tax rates due to their location.

One metric alone will not give a complete and accurate picture of how well a company operates. For example, some analysts believe that the cash flow of a company is more important than the net profit margin ratio.

Another ratio investors often use is the price-to-earnings ratio. This is a valuation ratio that compares a company's current share price to its earnings per share. It measures how buyers and sellers price the stock per $1 of earnings.

The P/E ratio gives an investor an easy way to compare one company's earnings with those of other companies. Using the companies from the above example, suppose ABC has a P/E ratio of 100, while DEF has a P/E ratio of 10. An investor can conclude that investors are willing to pay $100 per $1 of earnings that ABC generates and only $10 per $1 of earnings that DEF generates.

A high P/E ratio can indicate that a company's stock is overvalued or that investors may be expecting high future earnings growth. A low P/E ratio can indicate that a stock is undervalued or that future earnings are in doubt.

As mentioned, it's important to take into account a variety of financial data and other factors when doing research on a possible investment.

• The return on assets ratio can help you determine how effectively a company is using its assets to generate profit. The higher the ratio, the more profit each dollar in assets produces. It's calculated by dividing net income by total assets.
• The operating margin ratio uses operating income and revenue to determine the profit a company is getting from its operations. This ratio, along with net profit margin, can give investors a good feel for the profitability of a company as a whole. The operating margin ratio is calculated by dividing net operating income by total revenue.
• The return on equity ratio is another way to gauge profitability. It measures how well a company generates profit using money that's been invested in it (shareholder equity). It's calculated by dividing net profit by total equity.
• Inventory ratios can show how well companies manage their inventories . Inventory turnover and days of inventory on hand are often used. Bear in mind that the inventory method that a company employs can affect the financial data that underlie ratios. So, when comparing companies be sure that they use comparable methods.
• Take note of ratio analysis results over time to spot trends in company performance and to predict potential future financial health.
• Compare companies not just in the same industry, but with similar product types, years in operation, and location, as well. These factors can affect financial results.

What Are the 5 Categories of Ratio Analysis?

Ratio analysis includes these five types of financial ratios: profitability ratios, liquidity ratios, debt or leverage ratios, operations ratios, and market ratios.

How Do You Compare the Ratios of 2 Companies?

Start by choosing companies in the same industry. Narrow this down to companies with similar products, inventory methods, business longevity, and location. Then, compare the same financial ratios for both. Consider looking at a big picture of results over time rather than just one year-end snapshot.

Where Can You Find a Company's Financial Information?

Company information is available in many places, including news and financial publications and websites. However, to be sure of its credibility, look for financial information in audited company annual reports. In addition, the Securities and Exchange Commission (SEC) maintains financial and business information about publicly held companies in the online database called EDGAR . Access is free of charge.

Charles Schwab. " Stock Analysis Using the P/E Ratio ."

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10 Advantages and Disadvantages of Ratio Analysis

Ratio analysis is a powerful tool used by analysts and investors to evaluate the financial performance and health of a company by examining various financial ratios derived from its financial statements. 

However, like any analytical method, ratio analysis comes with its own set of advantages and disadvantages.

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Advantages of Ratio Analysis

• Financial Performance Evaluation : Ratio analysis provides a quantitative means to assess a company's financial performance over time. By comparing ratios from different periods, analysts can track trends and identify areas of improvement or concern.
• Liquidity Assessment : Ratios such as the current ratio and quick ratio help evaluate a company's ability to meet short-term obligations. This is crucial for assessing liquidity and determining if a company can pay off its debts as they come due.
• Profitability Analysis : Ratios like gross profit margin, net profit margin, and return on equity (ROE) help measure a company's profitability. This enables investors to gauge how efficiently a company is generating profits relative to its sales and equity.
• Financial Health Evaluation : Ratio analysis aids in assessing the overall financial health of a company by providing insights into its solvency, leverage, and efficiency in managing resources.
• Benchmarking : Ratios allow for comparisons between companies within the same industry or against industry averages. This benchmarking helps identify strengths and weaknesses relative to competitors and industry standards.

Disadvantages of Ratio Analysis

• Limitations of Financial Statements : Ratio analysis heavily relies on data from financial statements, which may not always accurately reflect a company's financial position due to factors like accounting practices, window dressing, or financial statement manipulation.
• Limited Scope : Ratios provide quantitative insights but may not capture qualitative aspects of a company's operations or industry dynamics, leading to an incomplete picture of its performance.
• Forecasting Challenges : Ratios are historical in nature and may not necessarily predict future performance accurately. External factors such as economic conditions, regulatory changes, or shifts in consumer behavior can impact future financial outcomes.
• Subjectivity in Interpretation : While ratios provide quantitative data, their interpretation requires subjective analysis. Different analysts may interpret the same ratios differently, leading to varying conclusions about a company's financial health.
• Overemphasis on Quantitative Metrics : Ratio analysis focuses primarily on quantitative metrics, potentially overlooking qualitative factors that could significantly impact a company's performance, such as management quality, brand reputation, or innovation capabilities.

Objectives of Ratio Analysis

The objectives of ratio analysis encompass various facets of financial analysis aimed at providing insights into a company’s financial performance and aiding in decision-making processes. One primary objective is to use ratio analysis for trend analysis, which involves comparing ratios over time to discern patterns and evaluate the progress of the business.

Additionally, ratio analysis is utilized to identify strengths and weaknesses within a company’s financial structure through the examination of ratios such as the debt-to-equity ratio, inventory turnover ratio, net profit ratio, and return on investment. These ratios help management to interpret financial statements effectively and make informed decisions regarding financial planning and forecasting.

Moreover, ratio analysis can be used to assess the reliability of financial information and to gauge the company’s ability to meet its financial obligations, as indicated by ratios like interest coverage and cash flow ratios. Analysts use these ratios to compare a company’s performance against industry benchmarks and previous financial periods, highlighting areas for improvement and potential risks.

Overall, ratio analysis serves as a useful tool for financial analysis and forecasting, providing valuable insights into a company’s financial health and aiding in strategic decision-making processes.

Limitations of Ratio Analysis

Despite its usefulness, ratio analysis is subject to several limitations that should be considered when interpreting financial data. One key limitation is that ratios are used as quantitative tools and may not fully capture qualitative aspects of a company’s performance. While ratio analysis provides valuable insights into a company’s financial health, it should not be solely relied upon for decision-making, as it may oversimplify complex financial situations.

Additionally, the use of ratio analysis requires a thorough understanding of accounting principles and financial statement preparation, as ratios are calculated using accounting information. Interpretation of ratios can vary depending on the context, and it’s essential to consider industry norms and benchmarks for comparison. Moreover, ratio analysis may not always accurately reflect the true financial performance of a company, as certain accounting methods can distort ratios.

Management uses ratio analysis to identify areas for improvement, but it’s crucial to recognize that ratios can also be manipulated or misinterpreted. Overall, while ratio analysis is a useful tool for financial analysis, it should be used alongside other methods to provide a comprehensive understanding of a company’s financial performance and position.

Conclusion of Advantages and Disadvantages of Ratio Analysis

In conclusion, ratio analysis is a method of financial statement analysis used by financial analysts to interpret a firm’s financial performance and make informed decisions.

By examining various financial ratios derived from financial data, including liquidity ratios, solvency ratios, efficiency ratios, and profitability ratios, ratio analysis helps investors and management to compare line items, assess trends, and evaluate the company’s ability to meet its short-term obligations and long-term solvency.

While ratio analysis offers numerous benefits, including the ability to compare financial performance, identify areas of improvement, and assist in financial planning and forecasting, it also has limitations. Ratios may be affected by different accounting methods, and their interpretation requires subjective analysis.

Moreover, ratios are calculated using historical financial information, which may not accurately predict future financial performance. Nevertheless, by understanding the objectives, advantages, and limitations of ratio analysis, financial analysts can effectively use these tools to assess a firm’s financial health, take corrective actions, and guide strategic decision-making processes.

Overall, ratio analysis is a valuable quantitative analysis technique that provides reliable insights into a company’s financial performance, aiding in financial management and investment decisions.

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What is Ratio Analysis?

What are the limitations of ratio analysis, additional resources, limitations of ratio analysis.

Factors that limit the efficacy of ratio analysis

Ratio analysis is a popular technique of financial analysis. It is used to visualize and extract information from financial statements . It focuses on ratios that reflect profitability, efficiency, financing leverage , and other vital information about a business. The ratios can be used for both horizontal analysis and vertical analysis. While they are a popular form of analysis, there are many limitations of ratio analysis that financial analysts should be aware of.

Image: Pyramid of Ratios from CFI’s Financial Analysis Course .

One of the key factors in ratio analysis is the comparison to the benchmark companies of an industry. This type of financial analysis can be useful to both internal management and outsider analysts of the company, as it provides significant insights from the financial statements.

As with any financial analysis technique, there are several limitations of ratio analysis. It is crucial to know these limitations to avoid misleading conclusions.

Some of the most important limitations of ratio analysis include:

• Historical Information: Information used in the analysis is based on real past results that are released by the company. Therefore, ratio analysis metrics do not necessarily represent future company performance.
• Inflationary effects: Financial statements are released periodically and, therefore, there are time differences between each release. If inflation has occurred in between periods, then real prices are not reflected in the financial statements. Thus, the numbers across different periods are not comparable until they are adjusted for inflation.
• Changes in accounting policies: If the company has changed its accounting policies and procedures, this may significantly affect financial reporting. In this case, the key financial metrics utilized in ratio analysis are altered, and the financial results recorded after the change are not comparable to the results recorded before the change. It is up to the analyst to be up to date with changes to accounting policies. Changes made are generally found in the notes to the financial statements section.
• Operational changes: A company may significantly change its operational structure, anything from its supply chain strategy to the product that they are selling. When significant operational changes occur, the comparison of financial metrics before and after the operational change may lead to misleading conclusions about the company’s performance and future prospects.
• Seasonal effects: An analyst should be aware of seasonal factors that could potentially result in limitations of ratio analysis. The inability to adjust the ratio analysis to the seasonality effects may lead to false interpretations of the results from the analysis.
• Manipulation of financial statements: Ratio analysis is based on information that is reported by the company in its financial statements. This information may be manipulated by the company’s management to report a better result than its actual performance. Hence, ratio analysis may not accurately reflect the true nature of the business, as the misrepresentation of information is not detected by simple analysis. It is important that an analyst is aware of these possible manipulations and always completes extensive due diligence before reaching any conclusions.

Thank you for reading CFI’s guide to the limitations of ratio analysis. To keep learning and advancing your career, the following CFI resources will be helpful:

• Financial Modeling Best Practices
• Financial Analysis Ratios Glossary
• Profitability Ratios
• Sensitivity Analysis
• See all accounting resources
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Ratio and Financial Statement Analysis

Executive summary, introduction, liquidity ratios, profitability, investors’ ratios, benefits and limitations, new practices, conclusion and recommendation.

Financial ratios show associations between various factors of the business operations. They entail comparison of income statement and balance sheet’s elements. These ratios are grouped into four distinct categories; liquidity ratios (Quick and current ratios), profitability ratios (ROE and ROA), leverage (debt-equity ratio and debt-to-assets ratio) and investors’ ratios (EPS and P/E). These ratios are beneficial since they summarize the financial statements and make it easy for investors to understand but they do have some drawbacks like use of irrelevant information in making future decision and different users of accounting information use different terms to depict financial information among others. Therefore, investors should be aware that ratios are good measures but they cannot be used solely to make financial decision as a result of these drawbacks. Thus, investors should seek other measures like non-financial analysis by looking at management style and experience, and morale of the employees among others.

Security analysts and investors frequently use ratios to evaluate the weaknesses and strengths of various firms. Ratio analysis is important in analyzing financial statements which is a crucial step before investing in any firm since it quantifies the firm’s performance in various factors like the firm’s ability to be profitable, ability of the firm to pay debt (liquidity of the firm), stability of the firm in paying long-term debt as well as the ability of the company to manage its assets (efficiency). Ratios normally compare the firm’s performance in a certain period and against other firms in the industry in order to determine the firm’s weaknesses and strengths and for investors or managers to take suitable investment and financing decisions (Liu and O’Farrell, 2009).

It is hard to deduce the firm’s performance from two or three simple figures. Nonetheless, in practice some diverse ratios are frequently calculated during strategic planning activities and in general because financial ratios do offer information on relative performance of the firm. Particularly, careful evaluation of a mixture of the ratios might assist in making a distinction between companies that will in the end not succeed from those companies that will succeed. Therefore, ratio analysis is discussed, and some benefits and limitations linked with their usage are emphasized. Lastly, ratios are more relevant when used to evaluate firms in the same industry (Nd.edu, 2010).

For survival, companies should be able to pay creditors and other short-term obligations. In this case, firm should be concerned with its liquidity by use of measures like quick ratio and current ratio. The major difference between these two ratios is that, the former does not use stock while the latter does. Quick ratio is a conventional standard; if it is more than one it implies that the firm is not facing liquidity risk and that is it can be able to pay current liabilities. And if not more than one but current ratio is above one, the firm’s status is more composite. In such a situation, valuation of stocks and stock turnover are clearly crucial (Nd.edu, 2010).

Stock valuation methods life LIFO and FIFO may contaminate current ratio. This is because firms use different methods when valuing stocks, which may overvalue or undervalue the stocks, making it hard to compare firms using current ratio. This means that quick ratio is the most preferred liquidity ratio (Nd.edu, 2010). Consider Hyatt Hotel Corporation’s quick ratio of 2010 and 2009, the firm’s liquidity position decline in 2010, implying that the firm was using more of current liabilities in 2010 compared with 2009. Compared to other firms in the industry like Red Lion Hotels and Intercontinental Hotels Group (IHG), Hyatt is more liquid than its competitors who are facing liquidity risk since the ratio is less than one as shown by Table 1.

Companies are funded by mixture of equity and debt and the optimal capital structure depends on the tax policy, corporate risk and bankruptcy costs. Two measures are used, debt-equity ratio and debt-to-assets ratio (Nd.edu, 2010).

Just like liquidity ratios, leverage ratios pose some issues in interpretation and measurement. In this case equity and assets are normally measured through book value in financial statements, the book value does not depict the company’s market value or value the creditors would receive if firm is liquidated (Nd.edu, 2010).

Ratios like the debt-to-equity ratios differ significantly crossways industries due to industry’s characteristics and environment.

A utility firm that is more stable can operate comfortably with comparatively superior debt-equity ratio while a cyclical firm like recreational vehicles manufacturer normally requires lower ratio (Nd.edu, 2010).

Frequently analysts use debt-equity ratio to establish the capability of the firm to generate additional finances from capital market. A firm with significant debt is frequently considered to have less additional-funding capacity. In reality, the overall funding capacity of the firm possibly depends on the new product’s quality that the firm is wishing to pursue with its capital structure. Nonetheless, given bankruptcy threat and costs, a superior debt-equity ratio might make future refinance hard (Nd.edu, 2010).

For instance, debt-equity ratio of Hyatt declined in 2010 indicating a reduction in the gearing level of the firm compared to the year 2009. Compared to its competitors, Red Lion and IHG, Hyatt is less geared and IHG is highly geared among the three firms as it is more than 100%. This implies that IHG is facing high financial risks while Hyatt’s financial risk is very low as shown by Table 2.

ROE and ROA are measures of firm’s profitability and are widespread in firms. Equity and assets as utilized in these ratios are book values. Therefore, if fixed assets were bought in the past three years at a lower price, this means that the present performance of the firm might be overstated through the utilization of past information. As a consequence, accounting returns of the investment are normally not correlated well with real economic project’s IRR (Nd.edu, 2010).

It is hard to use these two ratios in merger deals to measure the firms’ performance. Assume we have a firm X that used to earn net profit of $1,000 on the assets with book value of $2,000, for a large 50% as ROA. This firm is currently acquired by another firm Y that transfer the additional assets to its balance sheet at the buying price, presuming that the transaction is treated through the use of accounting method of purchase. Actually, the purchase price will be more than $2,000, higher than the assets book value, for a possible acquirer must pay higher price for privilege of gaining $1,000 on an ordinary basis.

Assume further the firm Y pays $3,000 for X’s assets. After the purchase, it will emerge that X’s returns have decreased, Firm X continues to make $1,000 but currently the asset base is at $3,000, and thus the ROA reduces to 33.33%. In reality, ROA might reduce due to other factors like rise in depreciation of the additional assets obtained. However, nothing has happened to net income of the company but only its accounting has changed and not the firm’s performance (Nd.edu, 2010).

ROE and ROA also have another problem in that analyst tend to concentrate on the single years performance, years that might be idiosyncratic. On average, one must evaluate these ratios over some years through use of average to separate returns that are idiosyncratic and attempt to identify patterns (Nd.edu, 2010).

For example, Hyatt’s ROE and ROA indicate that the firm’s profitability increased in 2010 implying that the firm’s efficiency in managing production costs, operating costs and cost of sales as well as assets had improved, while IHG was the most profitable firm among the three firms with, Red Lion being the least profitable firm as shown on Table 3.

These ratios are determined from the performance of the stock market and they include; P/E, Dividend Yield and EPS. EPS is widely used amongst the three ratios. In reality, it is shown on financial statements of the listed firms. EPS indicates how much each share invested in the firm has earned. This means that it is not a useful statistics since it does not show how many fixed assets the company utilized to generate those incomes, and thus nothing on profitability. It also does not show how much the shareholder has paid for each share invested in the firm for rights over the annual income. In addition, the accounting principles used to determine the income might alter these ratios and treatment of stock is also challenging (Nd.edu, 2010).

P/E ratio is also used and it is reported mainly in the daily newspapers. P/E ratio that is high indicates that the investors deem that the firm’s future prospects are superior to its present performance. They are paying more for every share than company’s present income warrant. And still the income is treated in different ways in diverse accounting practices (Nd.edu, 2010).

For example, in 2010 the EPS of Hyatt increased from 0.28 to 0.29 this means that for every share invested in the firm generated $0.29 of the firm’s earnings. Compared to competitors, Red Lion has the least EPS while IHG has the highest. The Hyatt’s P/E indicates the investors in 2009 and 2010 would take 106.46 and 157.79 years to recover their initial investment in shares from the earnings generated by that investment in the firm respectively, while its competitors’ investors will take less years for them to recover their initial investment as shown by Table 4.

Financial analysis involving ratios is a helpful tool for the users of the financial statements. Ratio analysis has some advantages that include; first, they simplify firm’s financial statements and also emphasize significant information in straightforward form quickly. Thus a user of the firm’s financial statements can judge the firm by only looking at some figures instead of examining the entire financial statements. Finally, the analysis assists in comparing firms of varying magnitude within the industry and can be used in comparing one firm financial performance over a particular period of time, normally referred as trend analysis (Accountingexplained.com, 2011).

On the other hand, the analysis poses some disadvantages in that information from the financial accounting is influenced by assumptions and estimates. Accounting standards let varying accounting policies that damages comparability and thus in such circumstances ratio analysis is used less. The ratio analysis describes relationships between historical information while the users are mostly concerned on the present and the future information. Different firms operate in diverse industries with diverse environmental conditions like market structure, and regulation among others. These factors are so important in that an evaluation of the two firms from dissimilar industries may be misleading (Accountingexplained.com, 2011).

For instance, a Chinese firm’s financial ratios might be exposed to misunderstanding by an investor from US as a result of variations in the accounting principles, institutional and culture environments, economic environments and business practices. China adopted IFRS ever since 2007 whilst firms in the United States are still applying U.S. GAAP to report accounting information (Liu and O’Farrell, 2009). The culture of China is centred on the relationships while culture of America is centred on the individuals. In addition the variation between collectivists and individualists, people of China have a tendency of being risk-adverse and conservative.

China is a socialism nation in evolution from the planned economy to the market economy while US on the other hand, is a nation having a market capitalism. These two nations have different GDP growth with China having the highest compared to US. Such variations may decrease the comparability and comprehension of information from financial accounting. The Chinese firms may be found to have lower Asset Turnover ratio probably as a result of firm’s high growth rate, superior Average Collection Period probably as a result of overstated debtors account and the requirement to guarantee steady employment, and a lower Debt to Net Worth ratio probably as a result of risk averseness nature of the Chinese individual investors (Liu and O’Farrell, 2009).

These disadvantages stirred researchers to investigate and make use of methods such as negative examination elimination, trimming, square root, logarithmic, logit as well as utilizing rank transformation in order to attain more projective independent variables (Bahiraie, 2008).

During utilization of ratios managers are more concerned with misinforming than informing. Managers therefore seek to reduce discretionary costs like advertising, training, research and maintenance among others, with the aim of increasing net profit whilst having a negative effect on the future income potential. New management might likewise write-down assets value to decrease the amortization and depreciation charges for future financial years. An entrepreneur might evade restocking inventory at some point in time especially before the end of the financial year in order to raise the firm’s current ratio. Short-term payment of the current liabilities or debt just before the end of the financial year will accomplish similar outcome. Retained earnings may be corrected for the future stock price decrease and afterwards recorded as net income.

Frequently an assessment of a sequence of the annual statements instead of one year will emphasize such practices. More excessive practices are normally avoided by companies that are required to answer to the regulatory agencies in order to be listed on the stock market or exchange (Best, 2009).

Ratios are normally utilized in strategic planning. These ratios may be manipulated through opportunistic practices of accounting. Nonetheless, taken collectively and utilized sensibly, they might assist in identifying companies or business divisions in particular problem. And finding new ventures that are profitable needs more effort. Therefore, investors should carry out their own analyses to determine which firm to invest in. Due to limitations of these ratios, the investors should also consider the non-financial analysis like the leadership style, morale of employees and experience among others.

Accountingexplained.com. (2011). Advantages and limitations of financial ratio analysis. Web.

Bahiraie, A., Ibrahim, N., Mohd, I. and Azhar, A. (2008). Financial Ratios: A new geometric transformation. International Research Journal of Finance and Economic , 20:165-171.

Best, B. (2009). The uses of financial statements . Web.

Liu, C. and O’Farrell, G. (2009). China and U.S. financial ratio comparison. International Journal of Business, Accounting, and Finance , 3(2): 1-13.

Nd.edu. (2010). Financial ratio analysis . Web.

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Financial Ratios Analysis

Executive summary.

Ratio analysis has been one of the many options for analyzing the performance of companies. Every single investor will be interested in monitoring the potential of each unit of investment made. Using the financial statements, the report calculated eight ratios in the three standard categories profitability, liquidity, and efficiency. The results generally indicated that Next Plc. was having a healthy performance throughout the investigation—all ratios were within the recommended rates. However, the trend analysis showed that the company was strangling across all the ratios in the second year 2021 as compared to 2020. The study concluded that there was a necessity for Next management to take measures that will help them improve profitability like extensive marketing campaigns, cutting operating costs, and improving their sales. Efforts to strengthen Next Plc. efficiency required policy adjustments regarding the receivables days.

Introduction

In finance, so many analysis approaches have been employed to give an understanding of a company’s performance. Among other methods, qualitative techniques such as SWOT analysis, PESTEL analysis, and BCG analysis have been used. However, quantitative analysis approaches give a better deal and understanding of business performance. On this note, the current report evaluated the quantitative situation of Next Plc. through the ratio analysis. Ratios offer an experience of the business performance by making a comparison of the business against its past years, against its peers, or even against its established budgeted performance (Attrill & McLaney, 2010).

The objective of the study

This report aims to evaluate the performance of Next Plc. in the years 2020 and 2021 through the computation and presentation of ratios in the profitability, liquidity, and efficiency areas. The report will communicate the score of the Next Plc. Against the recommended rates and present a recommendation to investors based on the results. In total, eight ratios were analyzed in the three categories based on their importance to investors.

Research Methodology

The study was a quantitative research design that offers much of its value by analyzing numbers behind the financial statements and presenting such numbers in the form of ratios, rates, percentages, or days for easy comparative analysis. The report performed a horizontal analysis comparing entities’ performance over several years (Haralayya, 2021). Therefore, ratios for 2020 and 2021 were obtained and analyzed as discussed in the section below. Financial ratios for the two years were obtained from Next Plc. (2021) as published by the company.

Ratios Analysis

Ratios analysis has been a widely used analysis approach in finance and management. Ratios provide a uniform unit of measure that compares businesses with others, even if they are not using the same currency or even tracking a company’s performance as it graduates the different levels of business growth.

Profitability ratio

Perhaps the most important ratio that investors would be interested in. Profitability ratios offer a picture of how a company can generate profits for the shareholders from different dimensions (Hasanaj & Kuqi, 2019). A company that scores well in the profitability ratios will attract more investors than a company performing well in any other ratio. The report evaluated the return on capital employed (ROCE), net profit ratio, and gross profit ratio, as presented below.

Return on Capital Employed

ROCE evaluates the profits a business generates relative to the long-term investments made by the company. The ratio assesses the earning before interest and tax against capital and long-term liability. Ayuba, Bambale, Ibrahim, and Sulaiman (2019) indicated that a higher value would be desirable, but a value above 20% will be acceptable. Next Plc. recorded 31.35% in the year 2020 and a rate of 17.36% in the year 2021. Thus, the company had a good performance in 2020, but a decline of 14% that fell below the recommended rate was an indicator of poor performance in 2021.

Net Profit Ratio

The ratio evaluates the ability of the business to generate profits from the revenue earned. A good performance indicates that the company translates more of its sales into net profit before interest and tax. In their study, Shad, Lai, Fatt, Klemeš, and Bokhari (2019) pointed out a higher value ranging between 10% and 20% would be desirable. Next Plc. reported a rate of 21.36% in 2020, and recorded a 7.83% decline in 2021 to 13.53%. Again, this indicates poor performance in the second year of analysis, almost falling below the bare minimum level.

Gross Profit Ratio

The gross profit ratio evaluates the rate at which the firm retains its revenue into gross profit. In other words, the ratio assesses the sales margin after adjusting the sales cost. A desirable rate between 50% and 70% have been preferred. Next Plc. recorded a value of 41.04% in 2020 and 38.00% in 2021.

From the profitability ratios above, the trend in the appendix indicates that all three ratios gave a declining performance in 2021. The performance of the business could be affected by the pandemic across the globe.

Liquidity Ratio

The category of ratios here evaluates the ability of a company to repay its due liability using its current assets. A healthy business will be able to cover up its current liabilities with current assets more than two times (Husna & Satria, 2019).

Current Ratio

The ratio evaluates the number of times the current assets cover the current liabilities. Meeting the current obligations more than two times is desirable. For Next Plc. a score of 2.1:1 and 1.9:1 in 2020 and 2021, respectively. The rate is within the recommended range for 2020, but a decline in 2021 indicates declining performance.

Acid Test Ratio

The ratio advances the diligence used in the current ratio by recognizing that inventory is a slow-moving asset. The ratio is expected to be slightly below the current ratio rates. Next Plc. Their performance during the review years recorded rates of 1.50:1 and 1:46 in 2020 and 2021, respectively. The strength of the business is noted to have declined in 2021.

From the liquidity ratios, the performance of Next Plc. seems to have been good in 2020 but declined slightly in 2021 for both ratios. The performance needs to be boosted by reducing the current liabilities through a positive policy on timely repayment.

Efficiency Ratios

Efficiency ratios assess the ability of the management of a company to use the resources at their disposal in the best way possible. Most of the ratios in this category are policy-based.

Inventory days ratios

The ratio evaluates, on average, the number of days the business will take to convert inventory into sales. The rate or number of days is highly influenced by the industry and nature of products offered. Next Plc. recorded values of 75 days and 88 days for the inventory.

Trade payables days

The ratio evaluates on average, the number of days it will take the business to repay their goods supplied on credit. The rate has it is the norm of most industries to use 90 days repayment period. Next Plc. recorded a value of 84 days in 2020 and 94 days in the year 2021. The rates for the two years seem to be within the recommended rates but with an increasing day in the second year.

Trade receivable days

The ratio assesses the number of days it will take a business on average to collect the trade receivable apon supplying goods on credit. Although a higher rate may attract debtors and increase sales, the rate of 90 days has been recommended. Next Plc. reported a value of 120 days in 2020 and 135 days in 2021 indicating longer than recommended rate and with a worsening trend.

In conclusion, the performance of Next Plc. has been noted to be fairly good in 2020 for all ratios considered except for trade receivables days. However, 2021 seems to be a downfall for the business across all the ratios considered with a declining trend being an indicator of strained performance. The report makes a recommendation to the managers to employ marketing strategies that can compel customer loyalty in the market for better performance in the profitability ratios. Managers should also make strategies to cut on cost of operations in an attempt to boost performance. Policies in relation to trade receivables should be reviewed to work with the recommended 90 days period.

Attrill, P. and McLaney, E., 2010. Finance and Accounting for Non-Specialists.

Ayuba, H., Bambale, A.J.A., Ibrahim, M.A. and Sulaiman, S.A., 2019. Effects of Financial Performance, Capital Structure and Firm Size on Firms’ Value of Insurance Companies in Nigeria.  Journal of Finance, Accounting & Management ,  10 (1).

Haralayya, B., 2021. Financial statement analysis of shri ram city union finance.  Iconic Research And Engineering Journals ,  4 (12), pp.183-196.

Hasanaj, P. and Kuqi, B., 2019. Analysis of financial statements.  Humanities and Social Science Research ,  2 (2), pp.p17-p17.

Next Plc., 2022. Next Plc. Annual Reports and Accounts for 2021. Available [Online] From <https://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2021/annual-report-and-accounts-jan21.pdf> Accessed on 17 March 2023.

Shad, M.K., Lai, F.W., Fatt, C.L., Klemeš, J.J. and Bokhari, A., 2019. Integrating sustainability reporting into enterprise risk management and its relationship with business performance: A conceptual framework.  Journal of Cleaner production ,  208 , pp.415-425.

Appendix : Next Plc. Ratios Results

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Walmart Company: Ratios and Analysis Research Paper

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Introduction

Evaluation of the status of walmart according to the ratios, the overall condition of walmart, recommendations.

While Walmart remains the leader in the US retail industry, it has also successfully expanded into the international market. In order to understand the company’s position in the modern market with reference to its competitors’ positions, it is important to analyze the data from the company’s 2018 Annual Report. Table 1 below presents the financial ratios calculated for the evaluation of the company’s financial performance with reference to the data given in the Annual Report. The purpose of this paper is to assess the current status of Walmart, draw conclusions regarding its overall condition, and provide specific recommendations to improve the company’s current, and future, situation.

Table 1. Walmart’s Ratios.

Utilizing the calculated ratios presented in Table 1, it is possible to evaluate the financial status of Walmart. It is important to note that the Operating Profit Margin after Taxes at 2% indicates that Walmart provides a comparably low value or profit to the company’s shareholders, but its position has been stable for several years (Walmart, 2018). The Gross Profit Margin at 24.7% is comparably high for the industry, demonstrating that Walmart generates the expected profit on sales (Brigham & Houston, 2016). In addition, the company’s Average Collection Period is low, accentuating Walmart’s capacity to turn receivables into cash within a comparably short period of time.

Furthermore, it should be noted that the company’s Total Asset Turnover (2.4) and Fixed Asset Turnover (4.3) improved from 2017 to 2018, indicating positive changes. In this context, Walmart’s Inventory Turnover is high for the industry, emphasizing that the company’s sales are stable and strong. Significantly, the company’s Debt to Total Assets is lower than 0.4 (0.38), and this denotes that Walmart does not depend on debt financing. In addition, Walmart’s solvency should be described as appropriate and risks for investors are low because Times Interest Earned is higher than 2.5 (9.38) (Walmart, 2018). From this perspective, Walmart’s financial status for the fiscal year of 2018 should be viewed as appropriate for the company to remain as leader in the industry.

The presented ratios and information from the Annual Report leads to the assessment of Walmart’s overall condition as strong and advantageous to address the recent trends in the industry. Indeed, the company’s Total Revenues and Net Sales increased by 3% in comparison to previous years (Walmart, 2018). Despite the decreases in the Gross Profit Rate, operating expenses increased significantly, referring to both the US and international markets.

The overall situation can be viewed as positive because Walmart’s net sales and assets continuously grew in comparison to the data for 2017 and 2016. Moreover, long-term debt and obligations decreased (from $42,018 million in 2017 to $36,825 million in 2018), reflecting on the financial situation in the company positively (Walmart, 2018). From this perspective, the company demonstrates stability in its financial performance during the past several years.

While concluding that the financial performance of Walmart is stable and strong, it is still possible to provide two areas of recommendation. Firstly, it is possible to improve the Operating Profit Margin after Taxes by adjusting marketing strategies in order to guarantee further growth in profits for the company (Brigham & Houston, 2016; Pandey, 2015). Secondly, it is reasonable to pay more attention to opening more stores during the following fiscal year, as well as improve eCommerce strategies, as both have contributed to increased net sales that have influenced the overall situation in Walmart. In the context of the second recommendation, it is necessary to focus on developing the international segment.

The analysis of data provided in the Annual Report for the 2018 fiscal year leads to the conclusion that Walmart is successful in preserving its position in the market in spite of the impact of competitors. While some ratios have fallen in comparison to previous years, the overall tendency is positive. From this perspective, Walmart’s net sales can be expected to increase, and the company remains attractive to investors and shareholders.

Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage Learning.

Pandey, I. M. (2015). Financial management (11th ed.). New Delhi, India: Vikas Publishing House.

Walmart. (2018). 2018 Annual report: Accelerating innovation . Web.

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• How to conclude an essay | Interactive example

How to Conclude an Essay | Interactive Example

Published on January 24, 2019 by Shona McCombes . Revised on July 23, 2023.

The conclusion is the final paragraph of your essay . A strong conclusion aims to:

• Tie together the essay’s main points
• Show why your argument matters
• Leave the reader with a strong impression

Your conclusion should give a sense of closure and completion to your argument, but also show what new questions or possibilities it has opened up.

This conclusion is taken from our annotated essay example , which discusses the history of the Braille system. Hover over each part to see why it’s effective.

Braille paved the way for dramatic cultural changes in the way blind people were treated and the opportunities available to them. Louis Braille’s innovation was to reimagine existing reading systems from a blind perspective, and the success of this invention required sighted teachers to adapt to their students’ reality instead of the other way around. In this sense, Braille helped drive broader social changes in the status of blindness. New accessibility tools provide practical advantages to those who need them, but they can also change the perspectives and attitudes of those who do not.

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Step 1: return to your thesis, step 2: review your main points, step 3: show why it matters, what shouldn’t go in the conclusion, more examples of essay conclusions, other interesting articles, frequently asked questions about writing an essay conclusion.

To begin your conclusion, signal that the essay is coming to an end by returning to your overall argument.

Don’t just repeat your thesis statement —instead, try to rephrase your argument in a way that shows how it has been developed since the introduction.

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Next, remind the reader of the main points that you used to support your argument.

Avoid simply summarizing each paragraph or repeating each point in order; try to bring your points together in a way that makes the connections between them clear. The conclusion is your final chance to show how all the paragraphs of your essay add up to a coherent whole.

To wrap up your conclusion, zoom out to a broader view of the topic and consider the implications of your argument. For example:

• Does it contribute a new understanding of your topic?
• Does it raise new questions for future study?
• Does it lead to practical suggestions or predictions?
• Can it be applied to different contexts?
• Can it be connected to a broader debate or theme?

Whatever your essay is about, the conclusion should aim to emphasize the significance of your argument, whether that’s within your academic subject or in the wider world.

Try to end with a strong, decisive sentence, leaving the reader with a lingering sense of interest in your topic.

The easiest way to improve your conclusion is to eliminate these common mistakes.

Don’t include new evidence

Any evidence or analysis that is essential to supporting your thesis statement should appear in the main body of the essay.

The conclusion might include minor pieces of new information—for example, a sentence or two discussing broader implications, or a quotation that nicely summarizes your central point. But it shouldn’t introduce any major new sources or ideas that need further explanation to understand.

Don’t use “concluding phrases”

Avoid using obvious stock phrases to tell the reader what you’re doing:

• “In conclusion…”
• “To sum up…”

These phrases aren’t forbidden, but they can make your writing sound weak. By returning to your main argument, it will quickly become clear that you are concluding the essay—you shouldn’t have to spell it out.

Don’t undermine your argument

Avoid using apologetic phrases that sound uncertain or confused:

• “This is just one approach among many.”
• “There are good arguments on both sides of this issue.”
• “There is no clear answer to this problem.”

Even if your essay has explored different points of view, your own position should be clear. There may be many possible approaches to the topic, but you want to leave the reader convinced that yours is the best one!

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This conclusion is taken from an argumentative essay about the internet’s impact on education. It acknowledges the opposing arguments while taking a clear, decisive position.

The internet has had a major positive impact on the world of education; occasional pitfalls aside, its value is evident in numerous applications. The future of teaching lies in the possibilities the internet opens up for communication, research, and interactivity. As the popularity of distance learning shows, students value the flexibility and accessibility offered by digital education, and educators should fully embrace these advantages. The internet’s dangers, real and imaginary, have been documented exhaustively by skeptics, but the internet is here to stay; it is time to focus seriously on its potential for good.

This conclusion is taken from a short expository essay that explains the invention of the printing press and its effects on European society. It focuses on giving a clear, concise overview of what was covered in the essay.

The invention of the printing press was important not only in terms of its immediate cultural and economic effects, but also in terms of its major impact on politics and religion across Europe. In the century following the invention of the printing press, the relatively stationary intellectual atmosphere of the Middle Ages gave way to the social upheavals of the Reformation and the Renaissance. A single technological innovation had contributed to the total reshaping of the continent.

This conclusion is taken from a literary analysis essay about Mary Shelley’s Frankenstein . It summarizes what the essay’s analysis achieved and emphasizes its originality.

By tracing the depiction of Frankenstein through the novel’s three volumes, I have demonstrated how the narrative structure shifts our perception of the character. While the Frankenstein of the first volume is depicted as having innocent intentions, the second and third volumes—first in the creature’s accusatory voice, and then in his own voice—increasingly undermine him, causing him to appear alternately ridiculous and vindictive. Far from the one-dimensional villain he is often taken to be, the character of Frankenstein is compelling because of the dynamic narrative frame in which he is placed. In this frame, Frankenstein’s narrative self-presentation responds to the images of him we see from others’ perspectives. This conclusion sheds new light on the novel, foregrounding Shelley’s unique layering of narrative perspectives and its importance for the depiction of character.

If you want to know more about AI tools , college essays , or fallacies make sure to check out some of our other articles with explanations and examples or go directly to our tools!

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Your essay’s conclusion should contain:

• A rephrased version of your overall thesis
• A brief review of the key points you made in the main body
• An indication of why your argument matters

The conclusion may also reflect on the broader implications of your argument, showing how your ideas could applied to other contexts or debates.

For a stronger conclusion paragraph, avoid including:

• Important evidence or analysis that wasn’t mentioned in the main body
• Generic concluding phrases (e.g. “In conclusion…”)
• Weak statements that undermine your argument (e.g. “There are good points on both sides of this issue.”)

Your conclusion should leave the reader with a strong, decisive impression of your work.

The conclusion paragraph of an essay is usually shorter than the introduction . As a rule, it shouldn’t take up more than 10–15% of the text.

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Effect of dietary standardized ileal digestible arginine to lysine ratio on reproductive performance, plasma biochemical index, and immunity of gestating sows.

Simple Summary

1. introduction, 2. materials and methods, 2.1. swine and diet, 2.2. recording and sampling, 2.3. chemical analyses, 2.4. statistical analysis, 3.1. reproductive performance of sows, 3.2. colostrum composition, 3.3. plasma iga, igg, igm, 3.4. plasma biochemical indexes and hormones, 3.5. plasma concentrations of free amino acids, 4. discussion, 5. conclusions, author contributions, institutional review board statement, informed consent statement, data availability statement, conflicts of interest, abbreviations.

• Kim, S.W.; Mateo, R.D.; Yin, Y.L.; Wu, G. Functional amino acids and fatty acids for enhancing production performance of sows and piglets. Asian-Australas. J. Anim. Sci. 2006 , 20 , 295–306. [ Google Scholar ] [ CrossRef ]
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Wen, X.; Jiang, Z.; Yang, X.; Xiao, H.; Gao, K.; Wang, L. Effect of Dietary Standardized Ileal Digestible Arginine to Lysine Ratio on Reproductive Performance, Plasma Biochemical Index, and Immunity of Gestating Sows. Animals 2024 , 14 , 2688. https://doi.org/10.3390/ani14182688

Wen X, Jiang Z, Yang X, Xiao H, Gao K, Wang L. Effect of Dietary Standardized Ileal Digestible Arginine to Lysine Ratio on Reproductive Performance, Plasma Biochemical Index, and Immunity of Gestating Sows. Animals . 2024; 14(18):2688. https://doi.org/10.3390/ani14182688

Wen, Xiaolu, Zongyong Jiang, Xuefen Yang, Hao Xiao, Kaiguo Gao, and Li Wang. 2024. "Effect of Dietary Standardized Ileal Digestible Arginine to Lysine Ratio on Reproductive Performance, Plasma Biochemical Index, and Immunity of Gestating Sows" Animals 14, no. 18: 2688. https://doi.org/10.3390/ani14182688

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