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Ottakar Company Case analysis Essay

Nowadays businessmen keep books of accounts and later on compare their performance with other companies in their industry so that they can remain in the business. Ratio analysis is the technique that is used to evaluate the financial position of a company.

Liquidly ratios

 They are ratios that indicate whether or not a company can be able to pay its creditors, expenses, loans falling due at correct times. A company may be able profitable, but may fail to generate enough cash to enough to settle its liability. Suppliers and providers of short-term finance are interested in assessing company’s ability to settle its current liabilities as they occur.

 Gearing ratios

They are used to assess the financial risk that may occur to a business. The business that has a larger proportional of debt capital to equity capital can be said to be highly geared and may be affected since an increased legal obligation to interest and principal can occur at the maturity date of the borrowed money.

The reasons why the two ratios are better than the other ratios are that they indicate the performance of the company. They can be used to determine whether a business performance is declining or not. They are also used

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to determine the long-term liquidity position of a company .If the gearing ratios are high it means that it company has higher debt level that may lead to its liquidation while a low ratio means that it’s financial stable. Unlike the other ratios that state how well a management of company has utilized the companys resources within a stipulated period of time (David, Bal. 2002).

Acid test ratio

It is a ratio that shows whether a company can be able to pay up its debts and also determines its ability to meet its unexpected demand of services without depending on the sale of inventory of the company. It is derived through calculating the difference between current assets minus inventories, accruals and the prepaid items to the current liabilities.

Gearing numbers refers to the number of times a company has used debt finance to finance its business premises. Debt repayment refers to the act of paying back principal money borrowed from the financial institutions and accrued interest associated with the borrowed money.

Ottakar Company

It is a company that is located in the United States of America .It was established by James Heanage in the year 1987.The company sells a chain of books and thus regarded as the fastest growing retail bookseller in the world.London based company has over 120 shops and the same applies to Scotland branch of the company. Has a flexible bookshop that enables it to adapt to its strong sizes and features at the individual local market, thus can be able to provide its book selling services to its customers at more effective and efficient manner. The management of company has continuously expanded its operations so that it can generate more revenue (David, B.L. 2002).

In the year 1999 it experienced some financial difficulties, due to the fact that it had not properly researched on the best sites in which it could carry out its operations, thus it recorded low profits. The company’s stock price started to decline by 66p per share, which illustrated how vulnerable it would go into liquidation (David, B.L. 2002).

The profitability ratio is the best ratio that could be used to determine the company’s current status. This is because the ratio shows how a company is performing through analyzing the profit earned relative to sales, total assets and the net worth of the company. The ratio is can be applied to the company because it can analyze the Ottakar Company’s performance. It shows how much profits the company can derive within a given period of time. In this case, after the company reviewed its strategies of carrying out extensive research on what would be appropriate sites the company’s operations would take place its performance started to improve and the revenue of the company increased.

Management of companies should occasionally review its strategies so that they can continuously derive enough revenue that enhances the continuity of a company into the foreseeable future.

                References

Financial Ratio Analysis

http://72.14.205.104/search?q=cache:ITVjJVXK4QQJ:www.bizmove.com/finance/m3b3.htm+What+kind+of+information+can+be+derived+by+an+acid+test+ratio&hl=en&ct=clnk&cd=17&gl=ke&client=firefox-a

Website accessed on September 24,

David, B.l. (2002).Ottawa’s Looks to New Chapter of Growth,” Financial Times, p. 28.

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