Exodus Venture Capital Ltd Assignment Example | Topics and Well Written Essays - 1500 words

Exodus Venture Capital Ltd - Assignment Example References 9 Exodus Venture Capital Ltd: Investment Decision Introduction Every business that comes into existence has some objective. While for non-profit organizations, these might be service to humanity and meeting basic needs of communities, for commercial enterprises it is most certainly the profit motive that is the focus of attention for the owners and management. We see that both Brindley Ltd. and Haines Ltd. are in the same industry sector of building materials. It thus makes sense to compare results of those companies that are in the same industry sector and therefore are faced with the same opportunities and threats from the external environment. Meanwhile the internal structure and organization of a particular firm would signify its strengths and weaknesses. Industry averages as computed by financial dailies like the Financial Times and rating agencies such as Dunn & Bradstreet, Standard and Poor and Value Line can also serve as a good baseline by which to compare and con trast the results of a particular firm (Weston et al, 2006, 73). The Importance of Financial Ratios In the absence of further information, financial ratios are a good way of determining the financial health and viability of a business enterprise. In other words, they give us a picture of the status of the business at a certain point in time. It has been agreed by the business and financial community that certain types of ratios are important to different stakeholders the world over. Thus we have different types of ratios as well such as liquidity ratios, profitability ratios, investment ratios etc. Debtors, creditors or investors, all these parties are interested in whether the business enterprise in question will be able to repay them their outstanding or give suitable returns on the capital invested in the business. Ratio analysis not only gives us a good idea of this possibility but also a comparative picture of how the firm is doing in comparison to others in the same industry s ector (Meigs & Meigs, 1993, 793). Thus popular websites such as Yahoo Finance not only have details of stock prices, fluctuations and ratios but also a comparison with industry averages. Such comparisons help us reflect not only on company performance but policy as well. For example the company might have too lenient a credit policy which might create stuck up loans and liquidity problems. It may find it difficult to attract additional funds from the public via share issue if it has a poor record of dividend declaration and payment. Types of Financial Ratios The most common types of financial ratios are as follows: 1. Short Term Solvency/ Liquidity Ratios 2. Long Term Solvency/ Debt Equity Ratios 3. Profitability Ratios 4. Asset Utilization Ratios 5. Investment Ratios (Rao, 1992, 112) Evaluation of Brindley Ltd. & Haines Ltd. Using Financial Ratio Analysis Short Term Solvency/ Liquidity Ratios 1. Current Ratio= Total Current Assets / Total Current Liabilities For Brindley Ltd. : ? 9 10,000 / 520,000 = 1.75: 1 For Haines Ltd. : ? 1050,000 / 600,000 = 1.75: 1 Incidentally, both companies have the same liquidity ratio so it seems both are equally preferred from the viewpoint of ratio analysis. 2. Quick/ Acid Test Ratio= Total Current Assets – Inventories – Trade Rec./ Total Current Liabilities For Brindley Ltd. : ? 60,000 / 520,000 = : 0.115: 1 For Haines Ltd. : ? 50,000 / 600,000 = 0.083: 1 Here we can see that Brindley Ltd. is in a slightly better position than Haines Ltd. However both firms would be unable to settle their