Exam (elaborations)
BUS 5110 Unit 8 Discussion Assignment
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A guide to assignment on ratio analysis to evaluate a firm's profitability, liquidity, solvency, and market valuation. A focus on Unilever Nigeria Plc
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Ratio analyses evaluate firm's profitability, liquidity, solvency, and market valuation. The firm Ihave chosen in week two is Unilever Nigeria Plc. and based on the company's income statement
and balance sheets various ratio analyses are done. (Note: All financial information is obtained
from https://finance.yahoo.com/)
Profitability Analysis
The first analysis is profitability analysis which is a measure of the effectiveness of management
in making sure the operational goals are achieved. For profitability analysis, we will analyze the
gross margin ratio and profit margin ratio. The gross margin ratio is calculated by deducting the
cost of goods sold from net sales and dividing by net Sales.
Gross margin ratio = (50,727,000-28,684,000)/50,727,000=43.45%, based on the industry
average of 30% Unilever is doing well.
Liquidity ratio
Liquidity ratio measures the ability of the organization to meet its short-term financial
obligations. For this, we perform the current ratio and quick ratio. Current ratio measures the
short-term financial risk and the ability of the organization to meet its short-term obligations.
Current ratio = Current assets/Current liabilities=16,157,000/20,592,000 = 0.78 to 1, this ratio is
lower than industry average of 1.1 to 1 and shows Unilever has an increased financial risk to
short-term creditors.
Quick ratio measures ability of the organization to easily convert its short-term associates to
meet its short-term obligations.
Quick ratio = Quick assets/Current liabilities=6,297,000/20,592,000 = 0.57 to 1 is within
acceptable industry range however, it needs to maintain this ratio.
Solvency
Solvency measure the ability of the organization to meet its long-term obligations and sustain its
activities to achieve its strategic goals. We can use debt to asset ratio, debt to equity ratio, and
time interest earned ratio to evaluate solvency. Debt to asset ratio measures the proportion
utilization of debt financing by the organization.
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