Accordingly, when using reported accounting numbers and ratios to form an opinion about a company’s performance over a three year period, or forming an opinion about how the performance of a group of companies compare with each other, consideration must be given to
How well the accounting numbers and ratios reflect the “real world”;
The company’s choices of, or changes over time in, accounting policies and in the estimation of items, e.g. assets, doubtful debts; and the points in time when items are measured; The comparability of accounting information of different companies; e.g. if their respective choices are different, how these differences should affect your judgements;
Other limitations of the financial statements and ratios. ContextYou are a member of a group of friends who wish to identify companies for which you would like to work. You all prefer to be employed in the same industry and you have agreed the company you would most like to work for is the company that is best at using its resources to generate wealth. Therefore you need to evaluate how well each company does this so that your group can rank the companies in order of how well they perform. You know that the ratio, Return on Assets, is an indicator of performance in this respect and you also know ratios can’t be taken at face value. Also, it is difficult for your group to gather regularly in one place to do this work and therefore you depend on technology to help you collaborate effectively.
The company Kresta Holdings Ltd has a large set of connections of display area across the countries of Australia and New Zealand, and each one is full with numerous exhibitions of canopies, shutters, curtains and awnings (Birchall & Stockwell, 2014). There are experienced designing advisors who are always available with professional recommendation to ensure enjoyment in their experiences.
The return on assets ratio i.e. known as the return on total assets is a ratio of profitability that takes into account the income of net figure formed by total assets throughout a period by the comparison of the net income and the average total assets (DEM?RC? et al., 2014). In the other terms, the ROA or the ratio of the return on assets is a measure of the efficiency of a company towards the management of its assets to generate proceeds during a phase of time.
The sole purpose of the assets of the company is the creation of the revenues and generating profits and this particular ratio assist both organization and investors to check the ability of a company to change its funds in assets into incomes. Hence, the ratio in short is a measure of the profitability of a company’s assets.
The three asset categories that will require closer inspection include the inventories, cash and cash equivalents and the property, plant and equipment. The income statement item included is the sale of the goods and the products.
The preparation of the statements of finance has a need of management to formulate rulings, approximation and hypothesis that have an effect on the reported sum in the financial statements. Administration repeatedly evaluates its judgments and estimation in connection to assets, liability, income and expenses. Administration is based on the estimation on the past understanding and on additional range of factors that is believed to be rational under the state of affairs, the consequence of which shapes the foundation of the carrying values of liabilities and assets that are not willingly obvious from other resources. Management has acknowledged the subsequent significant accounting strategies for which important judgments have been finished as well as the subsequent key approximation and suppositions made that have the most noteworthy force on the financial statements. Definite consequences may be at variance from this approximation under diverse supposition and circumstances and may significantly have an effect on financial outcomes or the financial position accounted in potential periods (Uechi et al., 2015).
The ratio of return on assets ratio deals with the effectiveness of a business of earning a return on its outlay in assets. Hence, ROA depicts the efficiency of a company to exchange the funds used to acquire assets into the net income or profits.
The assets have the funds that are backed up by equity or debts. Few shareholders try to take no notice of the prices of obtaining the amount of assets in the calculation of returns by addition of the interest expenses in the procedure. The higher the ratio, the more favorable it will be towards the shareholders because it demonstrates that the corporation is more efficiently supervising its assets to generate larger amounts of net profits. If the ROA ratio is positive, it will usually show a sign of a trend of an increasing profit as well. ROA has a major utility for the comparison of companies in the identical business as dissimilar industries use their assets in a different manner (Saunders & Cornett, 2014).
The return on total assets has been decreasing from the years 2014 to 2016 as the net loss has been increasing over the years and thus the trend has affected the incomes and total return on the total assets. Although, there has been an increase in the amount of the total assets throughout the years from 2014 to 2016, the income has decreased drastically and hence, the assets are falling short of meeting up the total losses (Wahlen et al., 2014). Therefore, the same has resulted in the lower ratio of the return on assets i.e. represented as below:
2014 2015 2016
Return on Total Assets (%) 4.10 -5.08 -1.77
There has been an increase in the net profit in 2016 as compared to the year 2015 but still the ratio is standing at a negative position that means the assets are not in upright position to maintain the profits.
On a scale of 1-10, the company is not being able to utilize its resources to a considerable extent, thus making the overall performance to be just little than very unsatisfactory i.e. satisfactory and hence the rating can be done at 5 i.e. satisfactory. In the year 2014, the company had generated a positive ratio of 4.1% i.e. it was excellent but, the ration drastically dropped down to a negative 5.08 resulting to a loss of the company. Further, the ratio showed a positive change i.e. 1.77 from 5.08 that represented a scenario of better positioning of the net income and the total assets (Bodie et al., 2014).
The Board of directors of the company oversees the measurement of the efficiency of management of risks along with the internal compliance and power. The responsibilities of evaluating and reviewing the risk management and internal control efficiency are allotted to management through the Managing Director and include accountability for the designing and implementation of the internal control system and the risk management on a daily basis. The reporting on such matters are presented by the board of management at the board reunion in a variety of ways including, in the course of the assessment of key performance pointers measuring monetary and other functional matters (Grant, 2016).
The Board of members has numeral amount of methods in position to make sure that the objectives of the management and actions have an alignment with the threats recognized by the Board of members and Directors. The procedures included are that firstly, the approval of the Board of a tactical plan, which takes in the vision, mission and strategy statements of the Company. Secondly, the same is designed to meet the requirements of the stakeholders and for the management of the business risk. Thirdly, there are approved operating plans and budgets carried on by the members and Board to monitor the advancement against the same (Brigham & Ehrhardt, 2013).
Birchall, A., & Stockwell, G. (2014). Bright future for young stars. Management Today, (Jan/Feb 2014), 14.
Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments, 10e. McGraw-Hill Education.
Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.
DEM?RC?, ?. D., Konuk, F., & ZEREN, F. (2014). PERSISTENCE OF PROFITABILITY IN TURKEY: EVIDENCE FROM INSURANCE SECTOR. Journal of Applied Economic Sciences (JAES), (IX_1 (27)), 57-64.
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
Saunders, A., & Cornett, M. M. (2014). Financial institutions management. McGraw-Hill Education,.
Uechi, L., Akutsu, T., Stanley, H. E., Marcus, A. J., & Kenett, D. Y. (2015). Sector dominance ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421, 488-509.
Wahlen, J., Baginski, S., & Bradshaw, M. (2014). Financial reporting, financial statement analysis and valuation. Nelson Education.