How to calculate key financial ratios


Assignment:

WES/WOW my company....

WES

Wesfarmers Limited

WOW

Woolworths

You are required to calculate key financial ratios for an ASX listed company and its competitor and interpret this information in the context of your allocated competitor company over time.

You will be allocated two ASX listed companies to study for this assessment. You must do your allocated companies in the order they are allocated to you. You canlook up your allocated companies under ‘You/Competitor' in MyGrades.

Imagine you work for the FIRST of these companies. The second is one of your company's competitor.

Your boss has asked you tocalculate and assess the company's key (your boss's opinion) ratios relative to that of its competitor and provide recommendations for improvement if required.

The key ratios you need to calculate for your company and your competitor are net profit margin, asset turnover, current ratio, quick ratio and debt ratio. Your boss also wants you to calculate the cash cycles.All workings for ratios and the cash cycles are required.

You focus your analysis on the companies' 2015, 2016 and 2017 ratios mentioned above firstly in terms of their trend changes and also in comparison to your competitors ratios.

In making your assessment consider potential differences between your company and its competitor that could explain divergentresults. Where relevant, these should be noted.(For example, although the companies may compete in some of thesame markets, they may also have different areas of business).

Chapter 8 of your textbook: accounting business reporting decision making 6th edition ,will give you a background explanation on these ratios and you should in your own wordsexplain a) the issues involved and relevance of using ratios, b) benchmarking and c) the relevance of yourparticular identified ratios as part of your discussion.

To undertake this task you will need to get some background information on the companies and collect some data to create ratios. Information required is available from DatAnalysis found by following the links from the SCU homepage to the ‘Library' and ‘Databases'. For the calculation of ratios aspect of this assessment use the ‘Financial Data icon and then across the top, Profit and Loss and also Balance Sheet as necessary.

Since your boss is a busy person and has little time to read lengthy reports, your submission for this task preferably should not exceed 1,000 words. Structure your submission as a very short report that excludes title and contents pages. Ensure you fully reference any non-text book or non DatAnalysis sources of data and information you use in this assessment.

Marks for this task are in accord with the separately provided marking guide.

In essence students should carefully study chapter 8 of the textbook and then calculate ratiosand the cash cycle for their company and its competitor. Next describe the meaningfulness of these calculations firstly theoretically (text book chapter 8) and then actually and relate the findings to their company and in contrast to their competitor company. Then outline possible company improvements highlighted by the ratiosand cash cycle and any weaknesses in using ratios.

Note also as follows -

1. The Cash Cycle can be a little confusing and some text books use different methodologies for calculating the three elements of the Cash Cycle. For your convenience the formulas are a) Inventory being Current Inventory / Operating Revenue * 365 = ???? b) Accounts Receivables being Debtors / Operating Revenue * 365 = ???? c) Accounts Payables being Creditors / Operating Revenue * 365 = ??? Note that you still need to work out the cash cycle from these calculations.

2. You can put calculations in an appendix if you wish. These do not count in word count. Make sure of course that your final ratio answers form part of you main report.

3. The report can be shaped as you wish keeping in mind the comments from the assessment task being - ‘since your boss is a busy person and has little time to read lengthy reports, your submission for this task preferably should not exceed 1,000 words. Structure your submission as a very short report that excludes title and contents pages. Ensure you fully reference any non-text book or non DatAnalysis sources of data and information you use in this assessment.

4. This is a Turnitin assessment so while we acknowledge that some Turnitin score will relate to the cover page and calculations which may be common to some other students you need to take due care with the actual original (yours) commentary of the report. This includes putting into your own words some theoretical discussion of the ratios which you may originally derive from the text book. If concerned then by all means use Harvard referencing.

5. Use the Discussion Board forum to raise any issues you may have with this assessment. This method ensures that students and tutors can get an idea of any questions that students may have. Try not to publish answers to your assessment if at all possible.

6. Note that your assessment will not be marked if you do not do your allocated companies and in the order they are given to you.

A special note on the calculation of the cash cycle. The cash cycle is made up of three ratios being Inventory, Accounts Receivable and Accounts Payable. Please note that these three ratios use operating revenue as their denominator. Maybe start with a brief commentary on what your company and its competitor does by way of introduction. Then for each ratio a quick theoretical discussion as to how the ratios you are reviewing are calculated and their meaningfulness.

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