Usefulness of Accounting Ratios in Financial Analysis

Accounting ratios be a technique normally adopted by fiscal analysts in order to highlight the financial health of the company at hand. There are a vast depend of accounting ratios, each of which egresslines certain aspect of the organisation.The main areas normally considered are the financial performance, financial congeal and financial stability of the corporation. In this view it is imperative that one first classifies the ratios in accordance with the aforesaid categories. In this respect, the ratios that portray the financial position of SR build usefulness express mail are current ratio, acid test ratio, parentage gamingover, debtors days and assent ratio.Ratios are a static figure, which on its own merits is meaningless to the financial analyst. Therefore it is important that such figure is either compared in the very(prenominal) organisation over time or with a company in the same or similar industry. The financial ratios of Easy Build limit are utilised in ord er to amplify the financial position of SR edifice Service exceptional. This will provide fruitful study on such facet.1.1 Financial Position of SR Building Service LimitedThe financial position of the company will be examined in terce main areas. These encompass the working capital on a generic wine basis, fol depressive disordered by the vigilance of stock and debtors plus creditors. This will be conducted in the proceeding sections.1.1.1 Working Capital of SR Building Service LimitedThe power of the current assets to silver screen the current liabilities of SR Building Service Limited is inferior to the other company. This is revealed by the reduce current ratio of the firm. The mutant of 0.71 indicates that the short-term liabilities of SR Building Service Limited are in a higher proportion to the current assets. Such variable implies that management is less effective in administering the working capital of SR Building Service Limited. kick upstairs more(prenominal), the ability of the most liquid assets (debtors and cash and cash equivalents) to cover the short-term liabilities is also weaker than that of Easy Building Limited. This factor is outlined in the lower acid test ratio amounting to 0.38.It is therefore pertinent to disk operating system that on a generic perspective the financial position of SR Building Service Limited is worse than the other business entity. Further amplification of the liquidity of the company can be performed by examining in more detail the main current assets and current liabilities of the organisation. These encompass the compendium of the stock, trade debtors and trade creditors of the firm. Such examination will be performed in the forthcoming sections.1.1.2 Management of StockThe stock turnover ratio portrays the number of clock stock of the company is turned over. The higher such ratio the more effective is the management in the utilisation of stock. An organisation with a low stock turnover ratio normall y implies that the company is stocking goods for a wide time.This is a highly risky element in light that the growth may quickly turn obsolete realising a price lower than its original cost. For example, stocking a lot for retailers of clothes and electronic equipment namely ready reckoner hardware is significantly risky. Clothes may easily turn out of fashion leading to the aforementioned effect, and technological advancements may quickly turn electronic goods into obsolete products. Indeed organisations like Toyota nowadays are adopting a Just in Time Inventory System. Such technique encompasses retentiveness stock to a minimum, normally zero level.In light of the above, SR Building Services Limited surpasses Easy Build Limited on the stock facet. At this stage one would thus ponder the reason wherefore the overall working capital of the firm at hand is weaker in comparison to Easy Build Limited. The proceeding examination may run out further light on such matter.