The report has been prepared with aim of analyzing the financial performance of Outdoor life Ltd. for the finances

Introduction

Outdoor Life Ltd is a mid-sized organization and is associated with the production of bicycles and related accessories and some other products like sleeping bags, tents and tarp in Berkshire, England. The organization was established by John Taylor and Mick Leeson in the year 2007 and had been performing well in the market, however as per the current set of financial report the organization’s performance has experienced a decline.  

Analysis

Ratio analysis as a tool allows the user to analyse the progress of the organization in a very short span of time without having to go through thousands of figures stated in the financial statements (Robinson, 2009). The analysis of whether the financial performance and position of the company has improved can be done by defining the profitability, liquidity/efficiency and financial position of the company. 

Defining ratio analysis – Ratio analysis is such a measure of financial performance that helps to analyse and implement the trend and financial health of the organisation. The trend in performance helps to calculate the ratios and it in turn helps for future projection. Management uses it as a tool for controlling the budget, finance and inventory (Velez-Pareja, n.d.).

Profitability

‘Profitability’ is the overall measurement of the efficiency of the organisation. If we can measure the output as a proportion of the input and differentiate the result with other organisation in the same industry for the same period then the respective variances in their profitability can be determined (Sanzo, 1977). 

The gross-profit denotes the profitability after the cost of goods sold incurred in respect to sales. It denotes the actual cost of goods sold as per the revenue. The GP Ratio of the organization has fallen from 0.50 in the year 2013 to 0.33 in 2014. Though the revenue has increased, the company has failed to reduce the COGS in terms of the increased revenue. The fall in the gross profit ratio points to the operational inefficiency of the concern.

The Net profit whereas denotes the profitability after deducting all the expenses both operating and non-operating other than the COGS. It denotes the net amount which is available to the shareholders (Hughes and Franks, 2008). As per the financial statements of Outdoor Life Ltd. the Net Profit has drastically fallen from 0.23 in the year 2013 to 0.08 in the year 2014. 

The Return on capital employed denotes the profitability as per total capital employed in the business. This particular ratio denotes the return from the business during a particular period of time against the total capital employed. The shareholders are keen to calculate this ratio as they need to evaluate the performance of the company. As per the current scenario of the company the profitability has decreased in terms of the total capital employed (MANISHA B, 2012).

Liquidity / Efficiency

The liquidity ratios of the company indicate its liquidity position. In simple terms these point to the fact how bankruptcy proof the organization and how fast can it meet its current liabilities.

Current Ratio = Current Assets / Current Liabilities

The short term liquidity is being measured by the current ratio. The ability to pay the short term liability with the help of the current assets is measured by this ratio. The current ratio of the organization has experienced a decrease and the same has come down from 2.47 to 2.32 in the year 2013. Though a current ratio of over 2 is a very strong indicator the organization should look into reasons for the decrease.

The Quick ratio describes the ability to repay the current liability with the help of the quick assets which do not include inventory held by the organization. This particular ratio has fallen in contrast to the previous year. 

Average collection and payable period

The receivables and the payables denote the ability to collect from the debtors and as well as the ability to pay the creditors (Auer, 2014). The average collection period of the entity has gone up by 3.04 days which points to the delay in the collection efforts of the concern. The organization’s payable period has decreased by almost 17 days which is evident from the fall in the current ratio. 

The particular ratio describes debt as a percentage of the shareholders’ capital. The gearing ratio indicates the capital structure of the organization and points out how leveraged the same is. The gearing ratio of the concern has increased from 1.30 in the year 2013 to 1.38 in the year 2014. 

Benefits of ratio analysis  

Ratio analysis helps to analyse and implement the financial requirements of the business and it also helps to compare the past performance with the industry standards or with itself over the years. Ratio analysis helps the users of the financial statements to save time by providing a snapshot of the overall performance of the organization (Frontera and Rodri´guez-Carvajal, 2003). It helps to identify and fix the duties of the managers at the different levels of the organisation. It determines the relationship of the various segments of the business by means of accounting statements.

Drawbacks of ratio analysis 

Ratio analysis as a tool can be affected by the biasness of the people using it. It does not take into the account the real value of the items; it only deals with their tangible worth. For instance ratio analysis can’t measure the loyalty of the employees of the organization. While comparing the ratios of the organisation with the others in the industry, the same may not reflect the true state of differences as the accounting policies of each of such organisation is different (Frontera and Rodri´guez-Carvajal, 2003). This tool does not take into account the effect of changes in the price levels of various items. It is totally dependent on the financial statements of the organisation, so if such statement does not show the true and fair picture, the ratios will also be unreliable and unrealistic.

Recommendations

The analysis points to the fact that the organization should look to improve its profitability and liquidity stance. Capturing a higher market share through the revision of prices should be the primary aim of the management of the organization. The entity should look to work more on its collection efforts as the same has witnessed a slack (Rodgers, 2008). Hence, considering various methods like factoring, cash discounts should not be a bad option for the organization. The cash position of the organization has worsened over the year and the organizations should consider revising its credit terms as currently it affects only 60% cash sales. The cost structure of the organization is a concern as the same has increased in-proportionately over the year.  

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