Financial Ratios Analysis And Comparison of Enterprise

1. Explaining Detailed Analysis of the Final Reports by Employing Different Techniques

Profitability Ratios

Operating Profit Ratio-

It means the profitability ratio which is computed by dividing the operating profit with that of the revenue of the company. It reflects the amount of profits that are generated by an entity after paying off its operating expenses and cost of sales (Bastos and Schoffelen, 2016). It is the ratio that depicts the efficiency of an organization in controlling the expenses and the costs that are been attached to running an operational activities of the business.

Interpretation-

From the above evaluation, it has been interpreted that the ratio of Farsons is showing better results as compared to Heineken. A higher ratio of the operating margin tends to be more favorable than a lower ratio as it clearly shows that an enterprise is been making a sufficient amount of money from its ongoing operations for fixed and variable costs. The operating margin of Farsons over the years indicated a rising trend because its profits and revenue are increasing so this shows that the firm is performing better from one accounting period to another but the percentage ratio of Heineken is declining which shows its poor performance from the previous years.

Net Profit Ratio-

This ratio indicates the amount of profits gained as a percentage of the revenue. It is calculated by dividing the net profit by revenue which depicts the profit earned by the company after making payment of tax obligations, costs, and expenses (Aktas, Croci, and Petmezas, 2015). It means the percentage value of the sales that is been left after paying off all the expenses that are deducted from sales. It is counted as an indicator of an entity's profitability and depicts the proportion of the revenue which is translated into the net profit.

Interpretation-

The results generated show that the profit margin ratio of Heineken is reflecting a decreasing trend over the years which clearly depicts the bad performance of the company. On the other hand, the NP ratio of Farosns is seen as better than Heineken as it increases with the passage of one financial year to another (Ramiah and et.al., 2016). This shows that Heineken needs to take corrective measures in order to improve its NP margin as it should reduce utilities, insurance premiums, labor costs, and operation costs and must focus on increasing the sales revenue.

ROA-

It is the ratio that tells about profits that have been earned by the company in relation to its total assets. It gives an idea to the analyst, manager, and investor is efficiently managing an enterprise by making use of its assets for the purpose of generating more and more returns. It is computed by dividing the profits by the total assets of the firm (Baker and et.al., 2017). This ratio is used for comparing similar companies with their previous performance. It takes into account the debt of the company and the other related metrics like ROE.

Interpretation-

A positive value of the ROA indicates an upward trend of the profits, however, a negative or low ratio reflects ineffective use of the company's assets with respect to generating larger returns. The ROA of Heineken is seen as stable in the past 4 years which clearly depicts that it is not making an efficient use of its assets for the purpose of generating profits. However, the ROA of Farsons has increased during the past four years resulting higher ratio than its competitor Heineken in turn means that it is making effective use of the assets so that higher profitability can be attained.

ROE- It is also one of the major profitability measures of the business relating to equity and is accounted for by dividing the net income by that of the shareholder's funds (Afrifa and Tingbani, 2018). It is counted as the measure that reflects the way in which a company makes use of an investment to generate growth in its earnings.

Interpretation-

Higher ROE is considered to be better than the lower ratios so as seen in the results generated return on equity of Farsons within the 4 years has been increased which means that the company is generating increased profits by using the money received from its shareholders in order to achieve growing success in the long run. However, the ROE of Heineken is declining as the year passes which indicates that the company does not perform well in gaining returns from the investment made by their shareholders.

Liquidity Ratios

Current Ratio-

It is the financial ratio that shows the proportion of an enterprise's current assets over its current obligations. It is the ratio that is classified in terms of the liquidity ratio and a larger value of the current ratio is seen as better than a lower value (Biswas and et.al., 2015). The liquidity of an entity highly depends on converting the assets into cash with an objective of making payments to fulfill an obligation.

Interpretation-

An ideal current ratio is said to be 2:1 and a higher ratio seems to show a better liquidity position of the company. The current ratio of Heiniken and Farsons is increasing which means that both firms are capable of meeting their short term obligations effectively and efficiently. Moreover, it has been reflected that the liquidity position of Farsons is better than Heineken because it had attained an ideal ratio and higher results in comparison to its rivalry which in turn depicts an ideal liquidity position of the firm as compared to its competitors.

Quick Ratio-

It is been defined as the acid-test ratio which reveals the ability of the company to meet its current obligation by making use of the immediate assets or the most liquid assets (Farrés and et.al., 2015). It is been computed by dividing the quick assets by the current liabilities where the quick assets are been attained as deducting an inventory from the current assets.

Interpretation-

From the analysis, it has been highlighted that the quick ratio of Farsons has increased over the years and equates to 1 which means that the company has sufficient cash for paying its current obligations. However, the QR of Heineken is also increasing but is lower than Farsons which states that it also has adequate cash but results from a poor liquid position in comparison to its rivalry.

Leverage Ratios

D/E Ratio-

It shows the percentage of financing made by an entity from investors and creditors. It is been computed by dividing the total liabilities by that of the shareholder's funds.

Interpretation-

This ratio is been utilized for evaluating the leverage position of the company and is counted as an essential metric that is used in corporate finance. The high value of the ratio indicates the firm or the stock with higher risk towards the shareholders. The analysis shows that the ratio of the two companies is showing an increasing trend and the ratio of Heineken is greater than Farson which means that the leverage position of Farson is better than its competitor as the lower ratio is better.

Debt-to-asset Ratio-

It is the leverage ratio that measures the amount of the total assets that have been financed by creditors rather than investors (Filbeck, Zhao, and Knoll, 2017). It shows the percentage of the assets that are been financed by borrowing in comparison with the percentage of the resources funded by investors.

Interpretation-

The ratio that is equated to 1 states that a company owes the same amount of the liabilities as its assets and is seen as highly leveraged. Both firms are resulting in a ratio that is lower than one which means that both are conducting their business with a better leverage position as it depicts the liabilities are lower than their assets.

Turnover Ratios

Accounts Receivable Days-

It is considered as an efficiency or activity ratio which measures the number of the times a business could turn its accounts receivables into cash during a particular period.

Interpretation-

A high ratio of receivable turnover indicates that the collection process of the company in terms of the accounts receivable is seen as efficient and it has a high proportion of quality customers who pay their dent obligation on a quick basis. As the ratio of Farsons is higher than Heiniken it means that the former company is more efficient than Heiniken and its collection process is much better than its rivalry.

Accounts Payable Days-

It means an efficiency ratio which measures an average number of days that the company takes in paying off to its suppliers.

Interpretation-

In case the number of days increases from one accounting period to the another period it indicates that the company is making the payment to its suppliers on a slow basis and might be an indicator of worsening the financial condition. The ratio of Farsons is increasing which means it is paying its suppliers on a slower basis while the ratio of Heineken is decreasing which depicts that it is making timely payments to the suppliers.

Asset Turnover-

It tells about an entity's ability to generate higher revenues by making use of the company's assets (Mathuva, 2015). It is an efficiency ratio that indicates the use of assets made by the firm for producing sales.

Interpretation-

The high ratio seems to be favorable and reflects an efficient use of the assets. The lower value of the ratio indicates that the assets are not been used effectively. As per the results ascertained, it is observed that Heineken is making efficient and optimum use of its assets as its ratio resulted as greater than Farsons over the 4 years of analysis made.

Inventory Turnover Ratio-

It acts as the crucial efficiency ratio that measures the way in which an inventory of the company is effectively been managed by making a comparison of the COGS with respect to its average inventory for a particular period.

Interpretation-

A high ratio states that an inventory is getting converted into cash quickly whereas a low ratio results in maintaining the excessive level of an inventory. ITR of Farsons is seen as higher and rising over the years as compared to Heiniken which in turn highlights that the former company is efficient compared to the latter.

Shareholders Ratios

Shareholders Funds Ratio-

It means the amount to which the assets are been funded by the shareholders' fund of an organization.

Interpretation-

A lower ratio indicated more and more debt that the company has used for funding its assets. It shows the ratio that the shareholders would be receiving at the time of the winding up of the company. The ratio of Farsons and Heineken has declined during the last 4 years and the Former enterprise has having lower ratio than the latter company which directly indicates the better ratio of

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