1. RATIO ANALYSIS
[Student Name]
[Institution Name]

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Business is ongoing process but behind it lots of check and analysis required just to ensure the
success conformity. Organization performs several analyses to critically review organization’s
performance and to check where the company stands in the market and how shares are in hand?
Organization cannot gain fruitful result without proper check and balance. This is one of the best
way to improve internal and external efficiencies, on the other hand company is able to produce
quality product and services. So behind everything proper planning is required and organization
starts it by reviewing its financial conditions. To handle financial activity no doubt is a difficult
task and demands very deep attention. So organization at the end of every year make financial
analysis, mostly organization perform quarterly and midyear financial analysis too through this
way they can easily plan other developmental strategies. Company used several financial ratios
by using company’s financial statements like balance sheets and income statements. Ratio
analysis evaluate organization’s performance through several aspects like efficiency, through
liquidity ratios, profitability and solvency ratios. This is the best way to about how much
company is liable to pay? How much assets and equities company have? What is the worth of
these assets in the market? What is the profit and loss average and how much it works for future?
So this was the brief discussion about why companies perform financial analysis? Next we
discuss financial ratios in detail and elaborate how our selected company Unilever perform its
financial analysis and how well all its financial activities are going.
Unilever is the world’s top brand dealing with food and all type of dairy and house hold grocery
material. According to one estimate, “150 million times a day somewhere people are choosing
Unilever’s products”. Unilever has so many big and small competitors and lots of substitutes in
the market available as well but Unilever successfully maintain its market share by maintaining
its quality of product and services. The best thing Unilever has is the trust of its customers and

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stakeholders. Unilever deals with diversified range of brands and each brand has its own product
lines. So, one can easily understand that how much it is difficult for Unilever to maintain such a
complex business activities. Unilever hire a team of professionals who leads its entire department
efficiently but everything is on one side and a financial activity alone is on other side because in
every business financial activities have a crucial role. Every single activity in organization
required money and it’s the duty of finance department to keep the record of every single penny
because little bit negligence in calculation will ruin all your hard work and efforts. Let have a
look on the financial activities of Unilever.
Ratio from Unilever’s financial statement
Ratios Forecasted Actual
2011 2010 2009 2008
Profitability Ratios
Gross Profit Margin 32.8 32.6 34.9 34.7
Net Profit Margin 8.3 7.3 8.0 6.4
Return on Asset 26.6 24.2 26.7 17.4
Return on Equity 93.8 91.9 92.8 89.6
Liquidity and Short Term Solvency
Ratio
Current Ratio 0.9 0.8 0.8 0.7
Acid-Test Ratio 0.8 0.8 0.7 0.6
Asset Management or Activity Ratio
Total Asset Turnover 0.3 0.2 0.3 0.2
Inventory Turnover 77.0 84.2 93.6 83.6
Capitalization Ratio:
Debt to Equity Ratio 2.5 2.8 2.5 4.1
Debt to Total Asset Ratio 28.4 26.4 28.8 19.5

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Profitability Ratios:
The most widely used ratios in investment analysis, in which company analyze the margins and
returns on investments. Organizations usually compare these ratios with its competitors to check
market stability. The chance of high margin exists when company offer unique products and
margin is low if several substitutes are available in the market. Profitability ratios comprises of
gross profit margin, pre-tax profit margin, post-tax profit margin, return on assets and return on
equity.
 Gross Profit Margin:
In above figure the gross profit margin raised by (0.2 percent) in previous years it is
32.6% now it is 32.8% this increase is due to the increase in products sale. So it
highlights that company is going good and earn profit. It also shows that it minimize the
cost of production too. The formula of calculation is :
Gross profit Margin= Gross Income / Net Revenue
 Net Profit Margin:
Net profit of the previous is 7.3% and this year it is 8.3% which is 1% greater than last
one and represent that company’s profit is maximizing and good hope for future too. The
formula calculation of this ratio is:
Net Profit Margin= Net Income / Net Revenue

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 Return on Assets:
This ratio represents the company earnings by utilizing company’s assets as a whole.
Figure shows 2.4% increase in return on asset which is greater than last year. So it means
management is effectively running all its operations. The formula to calculate this ratio
is:
Return on Assets= Net Income / Total Assets
 Return on Equity:
In previous year return on investment is 91.9% and now it is 93.8% which shows that
there is 1.9% in return on equity. It represent that company is earning good profit from its
equity as compare to the last year. The calculation formula for this ratio is:
Return on Equity= Net Income / total stakeholder’s Equity
Liquidity and Short Term Solvency Ratios:
 Current Ratio
In figure the 0.9% represent that company is able to pay 1 rupee of its liability by 0.9
rupee of company’s current assets. It means company is not in the position to pay its
current liabilities with current assets. But there is a chance of hope because the number is
better than the last year which is good and shows company is moving towards progress.
The formula of calculation is:
Current ratio= Current Assets / Current Liabilities

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 Acid-Test Ratio
This ratio is also known as Quick ratio. In figure is 0.8 which is not showing a good sign
but its same as previous. This ratio shows the company’s ability to pay its current liability
through cash equivalents. The calculation formula is:
Acid-Test Ratio= Cash + Account Receivable + Short Term Investments / Current
Liabilities
Asset Management or Activity Ratio
 Total Asset Turnover
Last year turnover is 0.3 but now it is 0.2 it is greater than last year which represent that
company can generate more sales by using its fixed assets. The calculation formula is
Total Asset turnover = Net Income / Average Total Assets
 Inventory Turnover
The inventory is not showing good results because in figure inventory turnover is 77%
which is less than the previous year with the total of 7.2%. It represent that company is
unable to efficiently sell its inventory. But it is okay because there is chance of
improvement. The formula to calculate this ratio is:
Inventory turnover = Cost of Goods Sold / Average Inventory

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Capitalization Ratio:
 Debt to Equity Ratio:
This year company’s equity ratio is 2.5 which is less than last year’s 2.8 means company
is improving and shows that company is using less debt to finance its assets. Formula of
calculating this ratio is
Debt to Equity Ratio = Total Debts / Total Shareholder’s Equity
 Debt to Total Asset Ratio:
This ratio is used to calculate that how much company is financing its assets through
debts. The current debt to total asset ratio is 71.5 which is a relatively low from previous
year but it is not too bad. The calculation formula is:
Debt to Total Asset Ratio = Total Liability / Total Assets
Overall the analysis shows that the internal financial position of Unilever is good to plan
future activities and there are lots of chances of improvement where company is bit lacking but
overall everything is going good. Company can overcome present issue through proper attention.
No doubt no one can predict future economic instability, on the other hand company have lots of
alternatives so company needs to be careful while developing strategies.

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Reference:
Barnes, P. (1987). The analysis and use of financial ratios: A review article.Journal of
Business Finance & Accounting, 14(4), 449-461.
Chen, K. H., & Shimerda, T. A. (1981). An empirical analysis of useful financial
ratios. Financial Management, 51-60.
Lewellen, J. (2004). Predicting returns with financial ratios. Journal of Financial
Economics, 74(2), 209-235.
Palepu, K., & Healy, P. (2007). Business analysis and valuation: Using financial
statements. Cengage Learning.
Volmer, F. G. (1992). Effect of graphical presentations on insights into a company's
financial position: an innovative educational approach to communicating financial
information in financial reporting. Accounting Education, 1(2), 151-170.