Use the calculated financial ratio below, compare the performance of al-Aqsa company between 2022 and 2021:
2021 2022 Industry Average
Current ratio 1.2 1.1 2
Quick ratio 0.76 0.8 1.25
Inventory turnover 0.8 0.7 1.6
average collection period 98 87 64
Profit margin 1.5% 2.1% 5.2%
Return on assets 4.5% 6.5% 1.1%
Return on equity 6.4% 9.0% 2.6%
Calculate and present financial ratios from a set of final accounts to compare the performance of the organisation for 2021 and 2022. Then Evaluate the performance of the organisation over this time period using the financial ratios with reference to relevant benchmarks.
Finally, critically evaluate financial statements to assess organisational performance using a range of measures and benchmarks and make conclusions. Your conclusions should be well-founded and backed by justified reasoning based on the assessment of financial data.
Performance Comparison of al-Aqsa Company for 2021 and 2022
To evaluate the performance of al-Aqsa Company for the years 2021 and 2022, we will compare the calculated financial ratios with the industry average benchmarks. This analysis will provide insights into the company's liquidity, efficiency, profitability, and overall financial health.
Liquidity Ratios:
a. Current Ratio:
The current ratio measures a company's ability to meet its short-term obligations. A ratio above 1 is generally considered favorable.
For 2021: Current Ratio = 1.2
For 2022: Current Ratio = 1.1
Industry Average: Current Ratio = 2
Both years show a current ratio below the industry average, indicating potential challenges in meeting short-term liabilities. However, the slight decrease from 2021 to 2022 suggests a slight deterioration in liquidity.
b. Quick Ratio:
The quick ratio provides a more conservative measure of liquidity by excluding inventory from current assets.
For 2021: Quick Ratio = 0.76
For 2022: Quick Ratio = 0.8
Industry Average: Quick Ratio = 1.25
Similar to the current ratio, both years' quick ratios fall below the industry benchmark. However, the increase from 2021 to 2022 suggests some improvement in short-term liquidity.
Efficiency Ratios:
a. Inventory Turnover:
The inventory turnover ratio measures how efficiently a company manages and sells its inventory.
For 2021: Inventory Turnover = 0.8
For 2022: Inventory Turnover = 0.7
Industry Average: Inventory Turnover = 1.6
Both years' inventory turnover ratios are significantly lower than the industry average, indicating slow inventory turnover and potential inefficiencies in managing inventory.
b. Average Collection Period:
The average collection period measures the average number of days it takes for a company to collect its accounts receivable.
For 2021: Average Collection Period = 98 days
For 2022: Average Collection Period = 87 days
Industry Average: Average Collection Period = 64 days
Both years' average collection periods are higher than the industry benchmark, suggesting slower collections and potential issues with credit management.
Profitability Ratios:
a. Profit Margin:
The profit margin ratio measures the company's ability to generate profit from its sales.
For 2021: Profit Margin = 1.5%
For 2022: Profit Margin = 2.1%
Industry Average: Profit Margin = 5.2%
Both years' profit margins are significantly lower than the industry average, indicating lower profitability and potential inefficiencies in cost management.
b. Return on Assets (ROA):
ROA measures how effectively a company utilizes its assets to generate profit.
For 2021: ROA = 4.5%
For 2022: ROA = 6.5%
Industry Average: ROA = 1.1%
Both years' ROA ratios are higher than the industry average, suggesting relatively better asset utilization and profitability compared to industry peers.
c. Return on Equity (ROE):
ROE measures the return generated for shareholders' equity.
For 2021: ROE = 6.4%
For 2022: ROE = 9.0%
Industry Average: ROE = 2.6%
Both years' ROE ratios are higher than the industry average, indicating better returns for shareholders' equity compared to industry peers.
Overall, al-Aqsa Company's performance for both years falls below industry average benchmarks in terms of liquidity, efficiency, and profitability ratios. The company faces challenges in meeting short-term obligations, managing inventory efficiently, collecting accounts receivable, and achieving desired profit margins. However, there are positive signs of improvement in short-term liquidity and returns on assets and equity from 2021 to 2022.
To enhance performance, al-Aqsa Company should focus on improving its liquidity position by managing working capital effectively, optimizing inventory management strategies, and reducing the average collection period. Additionally, efforts should be made to increase profitability by controlling costs and enhancing pricing strategies.
It is essential for al-Aqsa Company to analyze the root causes behind the performance gaps and implement appropriate strategies to address them. Regular monitoring of financial ratios and benchmarking against industry peers will help assess progress and make informed decisions to improve overall organizational performance.