FINANCIAL RATIO ANALYSIS

OF

FU-WANG
FOODS
LIMITED
Introduction
Financial analysis refers to an assessment of the viability, stability and profitability of a
business. Typically, financial analysis is used to analyze whether an entity is stable, solvent,
liquid, or profitable enough to be invested in. It is prepared using ratios that make use of
information taken from financial statements financial reports like income statement, balance
sheet, and cash flow statement. This analysis is presented to top management as one of their
bases in making business decisions.

Ratios can be divided into four major categories:

 Liquidity
 Profitability Sustainability
 Operational Efficiency
 Leverage (Funding – Debt, Equity, Grants)
Liquidity Ratio Analysis

Liquidity ratio can be used to determine a company’s ability to pay off its short term debt
obligations. So, naturally higher liquidity ratio would indicate firm’s strength to meet up its
short term obligations.I will evaluate here the Current Ratio and Quick Ratio.

Current Ratio

An indication of a company’s ability to meet short-term debt obligations, the higher the ratio,
the more liquid the company is. It is expressed as follows:

Current assets
Current Ratio:
Current liabilities

The ratio of current ratio 0f this firm is given below:

Particulars 2016 2015

Current Assets 873,650 780,953

Current Liabilities 386,602 873,650

Current Ratio 2.3 2.4

Interpretation:

By the analysis of 2 years CR of FU-WANG Foods LTD. We can find that

the company has very high current ratio that’s mean there is excess
cash that should possibly be invested elsewhere in the business or that
there is too much inventory.

Quick ratio:

The quick ratio measures a company’s ability to meet its short-term obligations with its most
liquid assets.The quick ratio or acid test ratio is calculated by deducting
inventories from current assets and dividing the result by current
liabilities

Current Assets-Inventory
Quick ratio =
Current liabilities

The ratio of Quick ratio of this firm is given below:

Particulars 2016 2015

Current Assets 873,650 780,953

Current Liabilities 386,602 325,451

Inventory 189,444 176,038

Quick Ratio 1.77 1.86

Interpretation:

Here FU-WANG FOODS LTD has a quick ratio of 1.77 in 2016, which is lower than 2015.
This means company solvency is decreasing to pay off its current debts.

Company must decrease the ratio by decreasing total liabilities or

increasing total asset in better position.

Activity Ratio :
Inventory turnover:

This ratio indicates the efficiency of the firm’s in selling product. The
inventory turnover ratio is defined as follows:

Cost of goods sold

Inventory turnover =
Inventory
The ratio of inventory turnover of this firm is given below:

Particulars 2016 2015

Cost of Good Sold 563,649 579,692

Inventory 189,444 176,038

Inventory Turnover 2.10 3.3

Interpretation:

This ratio helps us to determine how well the company is using its inventory to generate its
revenue.

FU-WANG FOODS LTD inventory turnover ratio is 3.3 in 2016 and 2.10 in 2015 , which is
good from the last year.According to the calculation FU-WANG FOODS LTD has a
turnoverratioin2016 is 3.3 times, which means it is earning TK3.3 worth of revenue for every
TK1 worth of inventory.

Average collection period (DSO)

Average collection period also called Days sales outstanding (DSO), is

used evaluate the firm’s ability to collect its credit sales in a timely
manner. calculated as follows:

Receivables
Average collection period =
Average daily credit sales

The ratio of Average collection period of this firm is given below:

Particulars 2016 2015

A/C Receivables 289,124 239,314

Average daily sales 2,101.668 2,246.167

Average collection 137.57 106.54

period

Interpretation:

In 2016 it took a much higher time to recollect the money from their customers for FU-
WANG FOODS LTD which is a bad sign for the company. As accounts receivable increased
and average per day sales decreased Average collection period has also decreased on
these years.

Total Asset Turnover

The total Asset turnover ratio measures how effectively the firm uses
its total assets to help generate sales. It is the ratio of sales to total
assets.

Sales
Total asset turnover:
 Total assets

If the present total assets turnover ratio is higher than previous it

would be better for the company’s present performance.

The ratio of Total asset turnoverof this firm is given below:

Particulars 2016 2015

Sales 767,109 819,851

Total Assets 1,482,203 1,343,232

Total Assets Turnover 0.52 0.61

Interpretation

In the year 2016 total asset turnover ratio has decreased which means in these years FU-
WANG FOODS LTD was able to generate less sales according to their total assts. By the
analysis we can say that, company must increase their sales.
Debt Ratio

The debt ratio measures the proportion of total assets financed by the
firm’s creditors. It’s formula:

Total Liabilities
Debt Ratio
Total Assets
The ratio of Debt Ratio of this firm is given below:

Particulars 2016 2015

Total Liabilities 443,293 391,456

Total Assets 1,482,203 1,343,232

Debt Ratio 29.91% 29.14%

Interpretation:

Debt Ratio is a financial ratio that indicates the percentage of a company’s assets that are
provided via debt. The higher the ratio, the greater risk will be associated with the firm’s
operation. In addition, high debt to assets ratio may indicate low borrowing capacity of a
firm, which in turn will lower the firm’s financial flexibility. FU-WANG FOODs LTD has a
ratio of 29.91% in 2016 & 29.14% in 2015 which indicates that it has a lower borrowing
capacity. Company must decrease the ratio by decreasing total liabilities
or increasing total asset in better position.
Profitability Ratio:

Profitability allows us to measure the firm’s ability to earn an adequate return on sales, total
asset and equity.

Gross Profit Margin

Gross profit margin measures the percentage of gross earnings of the company on its net
sales.

Gross Profit
Gross Profit Margin Ratio =
Sale

The ratio of Gross Profit Margin of this firm is given below:

Particulars 2016 2015

Gross Profit 203,460 240,159

Sales 767,109 819,851

Gross Profit Margin 26.52% 29.29%

Interpretation:

Gross profit margin refers, how much profit is earned on products without
considering indirect costs. In last two years, the gross profit margin of FU-WANG
FOOD LTD in 2016 is decreasing from 2015. Company must increase the ratio
by decreasing indirect costs in better position.
 Operating Profit Margin:

The operating profit margin represents the

“Pure Profits” earned on each sales.

Operating Profit
Operating Profit Margin Ratio =
Sales

The ratio of Operating Profit Margin of this firm is given below:

Particulars 2016 2015

Operating Profit 134,364 169,903

Sales 767,109 819,851

Operating Profit Margin 17.5% 20.7%

Net Profit Margin

Net profit margin measures the percentage of net earnings after tax of the company on its net
sales/net premium.

Net Profit after tax

Net Profit Margin Ratio =
Sales

The ratio of Net Profit Margin of this firm is given below:

Particulars 2016 2015

Net Profit after Tax 86,159 110,054

Sales 767,109 819,851

Net Profit Margin 11.23% 13.42%

Interpretation

The net profit margin for FU-WANG FOODs LTD in last was not good as it is decreasing
significantly. That means percentage change in sales of FU-WANG FOODs LTD was lower
than percentage change in net profit. Company should increase their EBIT to
keep increasing net profit.
 Earning Per share (EPS)

EPS represents the amount canned on behalf of each outstanding

share of common stock not the amount of earnings actually distributed
to share holders. EPS is calculated as follows.

Net Profit after tax

Earnings Per Share =
Number of shares

The ratio of EPS of this firm is given below:

Particulars 2016 2015

Net Profit after Tax 86,159 110,054

Number of shares 83,275 83,275

Earnings Per Share 1.03 1.32

Interpretation:

In 2016 the earning per share of FU-WANG FOODs LTD was 1.03 which is
lower than 2015, where the ratio was 1.32. EPS is closely watched by
then investing public and is considered an important indicator of
corporate EPS success. By the above analysis we can see the bad
position of the firm.
Return on Asset

Return on asset, often called the return on investment. It measures the

overall effectiveness of management in generating profits with its
available assets. We can get this ratio by this formula,

Net Income
ROA =
Total Assets

Higher rate of this ratio indicates the higher/ better position of a firm.
The ratio of ROA of this firm is given below:

Particulars 2016 2015

Net Income 86,159 110,054

Total Assets 1,482,203 1,343,232

Return on Asset 5.8% 8.1%

Interpretation Return on assets or ROA gives us an idea about how the firm has utilized
its assets to generate its net income. In 2016 the ratio was 5.8% which was
lower than 2015. The position of the firm is very bad according to this
ratio so it should need to increase its Net income as soon as possible to
improve or increase the company situation.
Return on Stockholders Equity

The ratio of net income to common equity measures the return on

common equity or the rate of return on stockholders’ investment,

Net Income
Return on equity =
Total stockholders’ equity

If the present return on equity is more than past ratios that indicates
the better position to the present then past.
The ratio of ROE of this firm is given below:

Particulars 2016 2015

Net Income 86,159 110,054

Total stockholders’ equity 1,038,910 951,776

Return on Equity 8.29% 11.56%

Interpretation
This ratio helps us to understand how much revenue the company has generated utilizing the
money invested by its shareholders. In 2016 the return on common equity was
8.29% which is lower than 2015 where the ratio was 11.56%. Company
should increase its Net Income against of Stockholders equity to
improve the situation of this company.