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Financial ratio analysis

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Financial Ratio Analysis

Introduction

In the current situation of IOI Ltd., ratio analysis possess a very important role in determining the past, present and future outlook of the company. Ratio analysis is the most extensively used form of financial analysis. In this section, ratio analysis is aimed at characterizing the firm in a few basic dimensions considered fundamental to assess the financial health of IOI Ltd..

Analysis & Discussion

Profitability

Profitability ratios are the projection of how successfully the firm is managing its assets and debts. Actually, profitability ratios measure the ability of the firm to generate earnings or how successfully the firm has generated earnings over a period of time. Profitability ratios are the indicators of the success or failure of the firms' activities.

Return on assets = Income/ Total assets

ROA 2007= 0.448699

ROA 2008 = 0.263468

Liquidity Ratios

Liquidity ratios determine the firms' ability to pay back her debt in time. This is a major influencing factor in the performance of any firm. The basic premise of the liquidity ratios is to determine the liquidity of the firm. In this section, we will focus on the current ratio only as it is the main determinant of a firms' liquidity.

Current Ratio = Current Assets/ Current Liability

Current Ratio 2007 =3.30

Current Ratio 2008 =3.04

From the above figures, it is clear that the trend in the current ratio is increasing which means that IOI Ltd is facing excess liquidity position in the current year i.e. 2008. Since the current ratio of 3 means that the firm has 3 for every 3 of the current liability. This is the most admirable situation. In this case the current ratio is continuously increasing which means that the company is not utilizing its currents assets properly i.e. the current assets are lying idle. This is also not good for the company in future.

Turn Over Ratios

Turnover ratios define the performance of the company in terms of turnover from assets, receivables and the inventory. They are essential for the company's financial evaluation.

Total asset turnover = Sales / Total Assets

Total Asset Turnover 2007 = 1.574673

Total Asset Turnover 2008 = 1.381621

From the above calculation, it is clear that the trend in the total asset turnover is increasing. This means that for every pound of asset the company owns, the sales is increasing. In 2007, the ratio was 1.5 which increased to 1.3. This is a positive sign for the company as its sales are increasing but on the other hand its assets are not increasing proportionately with sales. This is an area in which the company should give due consideration.

Are Returns Adequate?

As the quality of any franchise is reflected in a consistent ability to earn above average returns, I have evaluated IOI Ltd on this criterion as well, trying my hands at calculating EVA - Expected Value Added Analysis spreads for IOI Ltd from 2007 onwards. EVA is a way of measuring real corporate profits, that is, profits after taking into account the cost ...

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