2.

Business performance analysis:

In business performance analysis I will perform vertical analysis in which financial ratios will be
calculated in order to critically evaluate the Roast Ltd financial and performance analysis of the
year 2017 and 2018.

2.1.Profit and loss statement analysis:

For profit and loss statement analysis I will use Gross Margin, Profit Margin, Operating Margin,
and, Times Interest Earned, Return on Assets and Return on Equity.

Ratios Formula 2018 2017

1. Gross Margin Gross profit/Net sales 21% 26%
2. Profit Margin Net profit/Net sales 3% 2%
3. Operating Margin Operating Income/Net Sales 5% 3%
4. Times Interest Earned EBIT/Finance Cost 3.9 7.5
5. Return on Assets Net Income/Total Assets 6% 4%
6. Return on Equity Net Income/Total Equity 9% 5%

Analysis:

1. Gross profit margin of Roast Company is 21% for the year 2018 and 26% for the year
2017.And Gross Profit margin shows the percentage of sales after deducting the cost of
goods sold from the revenues. And it shows the company’s ability to manage its cost of
goods sold for earning higher gross profit margin. And decrease in Gross profit margin is
not a good indicator for the company.
2. Profit margin of Roast Company is 3% for 2018 and 5% for 2017 and Profit margin shows
the how much profit is being earned on the total sales after subtracting all the expenses
from the profit. And reduction in profit margin is not a good indicator for the company.
Because when expenses are less and strictly manage then Profit margin will increase and
shows the high profitability level of the company.
3. Operating Margin of the year 2018 is 5% and for the year 2017 is 3% and it indicates the
how much management is efficiently managing its general and administration and other
variable cost. And increase in operating margin shows that Roast management had reduced
 its variable cost in year 2018 and increase the operating margin which is beneficial for the
company.
4. Times interest earned of Roast Ltd is 3.9 for the year 2018 and 7.5 for the year 2017.And
it shows the ability of a company to pay its interest expense from the earning they have
been generated in the fiscal year. Decrease in Times interest earned ratio is not a good
indicator because it will increase the risk of default .But in case of Roast Times interest
earned ratio has been decreased but it in the safe zone. Because 3.9 ~ 4 shows that Roast
Ltd have the ability to pay its interest expense 4 times in a year 2018 from its earning.
5. Return on assets of the Roast Ltd is 6% for the year 2018 and 4% for the year 2017. And
it indicate amount of return earned on the investment in assets and increase in this figure
indicate good profitability of Roast Ltd.
6. Return on equity of the Roast Ltd is 9% for the year 2018 and 5% for the year 2017 and it
indicate the amount of return that is being earned on total equity of the company. And
increase in return on equity is a good indicator of profitability of Roast Ltd.

Conclusion:

On the basis of profit and loss statement analysis Roast management should pay attention and take
initiatives to increase profit margin by reducing the expenses and gross profit margin by reducing
the cost of goods in order to increase the profitability of the Roast ltd.

2.2.Balance sheet analysis:

In statement of financial statement analysis I will calculate liquidity ratios, solvency ratio and
efficiency ratios. Liquidity ratios are consisting of current ratio, quick ratio and working capital,
solvency ratios are consisting of debt to equity, debt to total assets and efficiency ratios are Days
sales outstanding, Days inventory outstanding and Days payable outstanding,

Balance Formula
sheet Ratios:
Liquidity Ratios 2018 2017
Current ratio Current assets /Current liabilities 1.45 2.51
Quick ratio (Current assets- 0.48 1.64
Inventories)/Current liabilities.
 Working Current assets-Current liabilities 139 209
Capital ratio
Solvency Ratios
Debt to equity Total Debt/Total Equity 0.67 0.31
Debt to asset Total Debt/Total Assets 0.40 0.23
Efficiency Ratios:
Days sales (Receivable/Revenue)*365 21 17
outstanding
Days (Inventory/Cost of goods 55. 22
Inventory sold)*365
outstanding
Days payable (Account Payable /Cost of goods 56 33
outstanding sold)*365

Analysis:

1. Current ratio of the Roast Ltd is for the year 2018 is 1.45 and for the year 2017 is 2.51 and
current ratio shows the company’s ability to pay its current liabilities from its current assets.
So, current ratio of Roast Ltd has been decrease from 2.51 to 1.45 which is not a good for
its liquidity position. Still company is able to pay its current liabilities from its current
assets but it is not a satisfactory position of Roast Ltd.
2. Quick ratio is also called acid test ratio and it tell us about the company’s liquidity position
and ability to pay its current liabilities after deducting inventory (which is not consider
more liquid current assets ) from it current assets. Quick ratio of Roast is 0.48 for 2018 and
1.64 for 2017.In 2018 Quick ratio has been decreased due to increase in inventory and it
company’s management should pay attention to maintain company’s liquidity position.
3. Working capital of Roast Ltd is 139 for year 2018 and 209 for the year 2017 and in 2018
it has been decreased which is not satisfactory because working capital is use in managing
day to day activities.
4. Debt to Equity ratio measures the company’s solvency position and to provide the
information about the proportion of debt and equity in capital structure. Roast Ltd had Debt
 to equity ratio in 2018 is 0.67 and 0.31 for the year 2017 and increase in Debt to equity
shows the increase of debt in capital structures of Roast Ltd and higher the amount of debt
in capital structure increase the default risk of company.
5. Debt to Assets ratio measures the company’s solvency position and provide the information
related to how much assets has been invested by the debt. Roast Ltd has 0.40 Debt to Assets
ratio in 2018 and in 2017 Debt to Asset ratio is 0.23.Higher the ratio indicated the riskiness
of the company because assets are more funded by the debt.
6. Days sales outstanding of the Roast Ltd in 2018 is 21 and in year 2017 is 17 which indicate
that Roast Ltd will receive its account receivable/cash in 2018 less quickly then 2017.
7. Days Inventory outstanding of the Roast Ltd in 2018 is 55 and 22 in year 2017 which
indicate that Roast Ltd.’s inventory will be sold in 2018 slowly as compared to 2017 which
is not good for the company.
8. Day’s payable outstanding of the Roast Ltd in 2018 is 56 and in the year 2017 is 33 days
which provide information that in 2018 Roast Ltd will pay its account payable to its
supplier and other parties with more delay as compared to 2017.

Conclusion:

On the basis of Analysis Company’s liquidity, solvency and efficiency ratios are overall
satisfactory but company’s management should take corrective initiatives in order to make them
better.

2.3.Statement of Cash Flows:

Formula 2018
Free Cash Flow EBIT+ Dep-increase in working capital-Capital -336
expenditure

Analysis:

Free cash flows indicate that the amount which has been left after paying all capital expenditure
from the amount which has been generated by the company’s operation. And cash flow from
operating activities or EBIT of the Roast Ltd is more than its Net income which shows quality of
its earning.
Operating Cash Cycle:

Formula 2018 2017

Operating Cash cycle DIO+DSO-DPO 20 6

Analysis:

Operating cash cycle also known as cash conversion cycle and for the year 2018 is 20 days and for
the year 2017 is 6 days. And shorter the time frame of operating cycle shows the efficiency of
company’s management for generating cash.