Assessment Details and Submission Guidelines Trimester

Introduction

HA1020

Financial Statement Ratio Analysis

Company Background

–The company selected for this assignment is “Bank of Queensland (BOQ)”. It is one of the regional banks of Australia.

At BOQ, the vast majority of their branches are controlled by nearby Owner-Managers. This implies they’re maintaining an independent company and comprehend delivering individual help.

They highly esteem fabricating long haul client connections that depend on common regard and comprehension.

They have in excess of 160 branches across Australia and in all of them since they have established themselves in the year 1874.

They’ve made straightforward, straightforward financial items to help uphold their clients’ monetary needs. They offer a scope of these items and administrations to people, just as organizations.

They’re one of the main 100 Australian organizations positioned by market capitalisation on the Australian Securities Exchange and are directed by the Australian Prudential Regulation Authority as an Authorized Deposit-taking Institution.

Financial Ratios

–Financial ratios are used by the company and its various stakeholders for conducting financial analysis.

–There are mainly four types of financial ratios like profitability, liquidity, turnover, and solvency ratios.

A financial ratio accounting ratio refers to the relative size of two selected numeric values derived from the company’s financial reports. The different types of financial ratios include: financial profit ratio, financial loss ratio, and net financial income ratio. Often used in financial accounting, there are a number of standard ratios utilized to assess the overall financial state of an organization or corporation. Financial ratios are used by the company and its various stakeholders for conducting financial analysis.

There are mainly four types of financial ratios like profitability, liquidity, turnover, and solvency ratios.

Calculation of Financial Ratios

–The ratios chosen for this purpose are Debt-Equity Ratio and Net Profit Margin.

–Debt-Equity Ratio = Total Debt / Total Equity

–This ratio falls under the major head of solvency ratios.

Solvency ratios are based on the ratio of assets to liabilities, or risk to solvency. It is usually calculated by applying ratios of assets to the outstanding liabilities of a corporation, or by determining the ratio of assets to the equity of a company. These ratios show whether or not a company has sufficient resources to fulfill its obligations and pay its creditors. The higher the ratio, the greater the risk of insolvency. If there is not enough available liquidity to fulfill its financial obligations, it could be assumed that a company cannot meet its creditors’ expectations.

Calculation of Financial Ratios (continued…)

–Net Profit Margin = Net profit after tax / Interest revenue

–This ratio comes under the major head of profitability ratios.

A profitability ratio or business ratio is a ratio calculated from two or more financial data sets to determine the relative profitability of a firm. Often used in business, there are several standard ratios being used to compare the overall profitability of a company or business. These ratios are also used to determine whether the company is profitable or not. A ratio will usually be found in a business’s financial reports but can also be used as part of a financial analysis. Many companies have different profit levels and these may vary from quarter to quarter, and therefore it is important to know how the ratio can be used to compare the profitability of a company with that of another company.

Debt-Equity Ratio

The debt-to-equity ratio is an economic ratio that indicates the amount of equity used to finance the assets of a business. More closely related to financing, the debt-to-equity ratio is also called risk, hedging or leverage. A business’ debt-to-equity ratio can be a useful indicator of the profitability of a business as well as its potential growth, but it can also provide a good indication of where a business will ultimately be headed. In essence, a business’s debt-to-debt ratio shows how much equity the company has compared to its debt. Businesses can have debt in different forms such as accounts receivables, inventory, bank loans, equipment, software, and raw materials.

Net Profit Margin

Net profit margin is an accounting measure of profit. It is derived by determining the net profit divided by the sales. Net profit is defined as the difference between total revenue and the total expenses. Profit margin is the portion of net profits that can be returned to investors. The profit margin refers to how much of a company’s earnings can be reinvested. The more money a business has in its bankroll, the more it is permitted to invest. As companies earn higher profit margins, they can offer more incentives to their customers. The profit margins may be based on their product or service quality and are determined by comparing price with sales revenue.

Interpretation of Ratios

–The reason for choosing debt-equity ratio is that it represents solvency of the company in the long-term.

–This is important for the company because the given company has both borrowings and equity in its financial statements.

A business’s debt ratio can be used to assess the performance of the company and provide important information to decision makers. The most important aspect of this type of analysis is its reliance on estimates and assumptions rather than an actual figure of how much debt is actually owed. When analyzing a business’s financial condition, it is important to look at the debt-to-capital ratio. By comparing the debt-to-capital ratio to other indicators, it can be an effective way of providing information to managers about a business’s financial condition.

Interpretation of Ratios (continued…)

–The reason for choosing net profit margin is that it represents the profitability of the company.

–This is important as investors get attracted towards the company by assessin g its profitability.

Because profit margins are calculated differently than expenses, profit margins are not necessarily equal to net profit. Net profit margin is usually lower than profit margins since it does not include expenses like advertising, employee benefits and taxes. Net profit can be considered a relative measure of profit that is determined by comparing the gross income with expenses. Net profit margins are normally lower than gross profit margins because expenses do not include the cost of goods sold, which includes the cost of overhead costs and inventory. In addition, many companies are forced to incur debt in order to finance operations, and this can affect the amount of profit earned by a firm.

Interpretation of Ratios (continued…)

–The calculations have shown that debt-equity ratio has increased in 2019 as compared to 2018. It means that the company has increased the proportion of debt in its capital structure.

A business with more equity can afford to pay higher interest rates on the debts. Conversely, when the debt ratio becomes too high, it is time to start making some hard decisions for the business. Some businesses choose to merge with other companies to form larger entities, while others may decide to file for bankruptcy and liquidate assets. On the off chance that a ton of obligation is utilized to fund development, an organization might produce more profit than it would have without that financing. On the off chance that influence builds income by a more prominent sum than the obligation’s cost (intrigue), at that point investors ought to hope to profit. Be that as it may, if the expense of obligation financing exceeds the expanded salary produced, share esteems may decay. The expense of obligation can fluctuate with economic situations.

Interpretation of Ratios (continued…)

–The calculations have shown that net profit margin ratio has increased in 2019 as compared to 2018. It means that the company has earned more profits in the year 2019 which is good sign with the investment point of view.

Net revenue is a solid marker of a company’s general achievement and is normally expressed as a rate. Notwithstanding, remember that a solitary number in an organization report is infrequently sufficient to call attention to generally organization execution. An expansion in income may mean a misfortune whenever followed by an increment in costs. Then again, a reduction in income, trailed by close command over costs, may put the organization further in benefit.

A high net overall revenue implies that an organization can adequately control its expenses or potentially give products or administrations at a cost essentially higher than its expenses. Consequently, a high proportion can result from productive administration; low costs; and solid evaluating procedures.