The financial ratios of Rolls Royce and its major competitors Essay

The financial ratios of Rolls Royce and its major competitors - Essay Example According to the research findings every business, no matter small or large, constantly evaluates its company’s performance by comparing it with competitors, industry and its own past performance. In order to do so, businesses not only look at the figures of sales, profit and costs but also prepare other criterion for measuring performance which helps in reading between the lines of financial statements. The most widely known and reliable approach of evaluating a firm’s performance is by calculating and comparing its financial ratios. The basic reason for doing so is because this information is understandable for every person who has some level of knowledge of financial concepts. By comparing the ratios with the competitor of the firm or with its past performance, a clear idea can be obtained. For this purpose, the company which has been chosen is Roll Royce. It is a diversified company having its operations in the field of aerospace, nuclear market, civil defense and m arine and energy. It was founded in 1971 and has its headquarters in London, United Kingdom. Activity Ratio also called as Liquidity Ratio helps a firm in determining the ability of a firm to meet its current liabilities. Activity Ratio is that investment or cash which is used to pay off the short term debts as well as expenses. Current Ratio is determines whether the firm has enough liquidity to pay off its expenses and short term debt. Theoretically, if current ratio is around 2.00 then it is considered as the most preferable. This ratio possesses huge consideration because if this ratio is declining it means that the cash position of the company is getting eroded. For that reason, the quickest way which can increase cash is increasing the amount of sales. Quick Ratio This ratio is also known as Acid Test Ratio. This ratio determines that if inventories are excluded, then is the firm able to pay off its short term expenses? Quick ratio is usually preferable if it is 1 or near to 1 . If this number is decreasing, then it means that enough sales are not being generated to pay off the short term debt or day to day expenses. In order to improve such situation, intervention regarding Quick Cash Management is required. Net Working Capital to Sales This ratio determines the company’s performance in relation to its sales, after meeting the short term obligations or liabilities, Efficiency Ratio Efficiency ratio determines the efficiency of a business or in other words, how well the business operations are conducted. These ratios determine how well and quickly the company collects its accounts receivables, how quickly the inventory moves and how much sales are generated by the company’s assets. Efficiency ratios include: Inventory Turnover Receivable Turnover Payable Turnover Days Inventory in hand Debtors Collection Period Creditors Payment Period Inventory Turnover Inventory turnover ratio determines the total turnovers of inventory. This ratio determi nes the efficiency of inventory management. If inventory turnover ratio is higher, then it means that firm is really efficient in rolling over its inventory. However, in some cases high inventory turnover ratio also means that firm doesn’t have enough inventories on its hand and therefore losing its sales.