Question 1

Puma PLC is the multinational corporation with the headquarters in Germany famous for manufacturing and selling both sports and casual apparels and footwear. Sports accessories are also manufactured and sold by this company and it is one of the famous sportswear producers around the globe. The annual report for the Puma PLC for the year 2019 is selected for the purpose of ratio analysis and the consolidated income statement and balance sheet is used for the purpose of performing the analysis.

1. Profit margin: Profit margin ratio provides information related to the portion of the profit or the income earned by the company from making sales. It is one of the important ratio which is used by the company and the stakeholders, in order to evaluate the financial position and also, several decisions can be taken based on the ratio. It establishes relationship between the profit and sales of the company and evaluate the company’s earnings in relation to the sales (Shreeda & Shah, 2018). The profit margin can make use of two formulas:

• Gross profit margin: It analyses the gross profit earned by the company in relation to the sales.
• Net profit margin = It studies the relationship of the net profit and the sales of the firm.

Interpretation: The gross profit margin ratio of the company depicts that the company earning a gross profit of 48% in the year 2018 and it is more or less the same in the year 2019 representing 48.8 earning capacity in relation to the sales. The net profit margin of the company has shown an improvement from 2018 to 2019 and it has increased from 4.94% to 5.6% in 2019. Overall, the company’s gross profit ratio is sufficient, but supply to profit ratio is showing an average performance of the company. It means, the company is spending a lot on the general administration expenses, operating and non operating expenses (Hantono, 2018).

1. Current ratio: Current ratio studies the relationship of a company’s current assets with the current liabilities. The purpose of this ratio is to understand the short term liquidity position of the company because it is very important to understand if a company is having sufficient current assets in comparison to the current liabilities in order to continue the day-to-day operations without any problems.

Current ratio = Current Assets/Current liabilities

The current assets and current liabilities of the Puma are shown in the financial position statement and the current assets consist of cash and cash equivalents, inventory, trade receivables, Income Tax receivable, other current assets and financial assets. The current liabilities of the company include current financial liabilities, income Taxes, trade payables, current provisions, lease liabilities, current financial liabilities and other liabilities. The total current liabilities for 2018 are 1195.2 million euros, and for the 2019 are 1558.9 Million Euros. The current assets are 2192.8 Million euros and 2481.2 Million euros for 2018 and 2019 respectively.

Interpretation: Current ratio of the company for the year 2018 1.83 and it has decreased to 1.59 in the 2019. It shows that the current assets of the company in comparison to the current liabilities have reduced in 2019 (Srinivasan, 2018).

1. Working capital turnover: Working capital turnover ratio establishes the relationship between the sales of the company and the working capital. Working capital is the net assets a company has to perform the daily activities of the business. It is calculated by deducting the current liabilities from the current assets.

Working Capital = Current Assets – Current Liabilities

Working Capital Turnover Ratio= Sales/Working capital

Interpretation: The working capital turnover ratio has improved from the year 2018 to 2019. It was 4.66 in 2018 and have improved to 5.97 in 2019. Working capital turnover ratio helps to understand the capacity of the company to run smoothly on the daily basis. Positive working capital of the company is a good sign.

d.     Debt to assets

The debt to asset ratio, consider the total debts of the companies and the total Assets of the company. It provides a broader picture related to the assets and liabilities of the company. It is a kind of leverage ratio, which helps to understand how much asset are being financed by the company using the liabilities instead of the share capital (Shreeda & Shah, 2018).

Debt to Asset ratio = Total Debts/Total Assets

The total debt represents the summation of the current and non-current liabilities of the company. On the other hand, total assets represent the summation of current and noncurrent Assets of the company.

Total Debt = Current Liabilities + Non-current Liabilities

Total Assets = Current Assets + Non current Assets

Interpretation: The debt to asset ratio of 2018 46% and in the 2019 it has improved to 56%. It mens the company has started using more leverage or debt to finance the assets of the company. Leverage is important for the financial stability of the company (Puma, 2019).

 Question 2

The ratio analysis helps us to understand the earning capacity of the company and the financial stability of the company and in helping us to evaluate each and every component of the financial statements that their income statement and balance sheet and established various meaningful relationships. Though it is widely used by the management of the company in order to make meaningful decisions and make strategies, the ratio analysis is not impeccable and have some limitations:

• The first limitation of the ratio analysis is the historical data which are used to establish the relationship between different components of the income statement and balance sheet. However, some companies cannot predict with proper assurance about the future earning capacity because the analysis is based on past data and the future is always full of uncertainties. For example, in the above case, I have seen that the changes in the components of the consolidated statements and the percentage of the ratio taken place in the two years.
• Sometimes the profits do not show the exact performance of the company because of the presence of inflation and the seasonal effects. Therefore, the Adjustment has to be made for the inflationary prices and seasonal fluctuations in order to understand the true performance.
• The changes in the policies related to accounting, the procedures for the handling of inventory and charging depreciation, the changes and operational strategy of the company also affect the ratio analysis and misleading conclusions are produced due to the non-comparability (Faello, 2015).
• In the case of the manipulations and mistakes done by the company in the preparation of financial statements, the ratio analysis will not give the true picture of the company.
• Therefore, a company’s performance can be predicted to some extent using ratio analysis, but one should not be dependent on only this analysis to make the decisions because the analysis is based on some limitations.

References

Faello, J. (2015). Understanding the limitations of financial ratios. Academy of Accounting and Financial Studies Journal , 19 (3), 75-86.

Hantono, H. (2018). The effect of current ratio, debt to equity ratio, toward return on assets (case study on consumer goods company). 7 (2).

Puma. (2019). Consolidated statement of financial position.

Shreeda, S., & Shah, V. (2018). A Study On Financial Performance Using Ratio Analysis of Visa Steel Limited final.

Srinivasan, P. (2018). A Study on Financial Ratio Analysis of Vellore Cooperative Sugar Mills at Ammundi, Vellore.

Appendices

Figure 1: Consolidated Balance sheet of the company (Puma, 2019)

Figure 2: Consolidated balance sheet of the company continued (Puma, 2019)

Figure 3: Consolidated income statement of the company (Puma, 2019)