Business / Financial Ratio

Financial Ratio

Autor:  pangn  05 October 2013
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Words: 593   |   Pages: 3
Views: 202

Start from current ratio and operating cash flow ratio which presents the liquidity of two companies. The first ratio indicates that the current assets of WOW are not sufficient to settle its current liabilities (within the 12 months period) compared with WES(0.9 and 1.1). While the operating cash flow ratio illustrates that both WOW and WES are not generating enough revenue to pay off its short-term debts, although WES is in a better situation by 0.02(0.39 and 0.41). Both the two ratios of WOW are lower than those of WES. Therefore, WOW has a lower liquidity than WES roughly.

However, when considering operating efficiency, it is a little bit weired that the inventory turnover of WOW is lower than that of WES(10.86,11.43) while the total asset turnover of it is higher oppositely(2.68,1.39). It is mainly due to the difference in total assets in both firms.

Then, we come to the financial leverage which demonstrates the proportion between average assets and equity. Since the financial leverage of WOW is larger than 2 while WES’s is only 1.66, it means WOW is more relied on liability funding and WES has a larger scale of assets. Although it is reasonable for supermarket use reliance to purchase more daily consumption as they are always in highly required, WOW's debt presents large part of assets. In other words, WOW takes full use of the financial leverage to complete its operation cycles. Yet it need to concern that this method is also kind of risky relatively.

As above, the interpretation is clear that WOW owes more liabilities and this situation leads to the higher total asset turnover and lower current asset turnover. It means in fact, WES has a more efficient operation comparatively as its higher inventory turnover confirms the deduction (WES's inventories takes shorter time from purchase to sold).

For profitability, WOW and WES performed neck and neck during the year ended at 30 June 2013. AS the net profit margin of them are very close (6.13% and 6.11%). The g...



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