# Ratio Analysis And Overview Accounting Essay

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Ratio analysis is the most widely used technique for interpreting and comparing financial reports. Also, ratios are useful for the purpose of comparing performance from year to year and the performance of different companies given that their aggregate figures always differ in magnitude. It's essential to note that the collection of ratios on a systematic basis allows trends to emerge and throws into relief the significance of changes indicated by the analysis of current events. Considering the fact that the future is uncertain, dealing with ratios has to be merged with its past behaviour therefore enabling future changes be predicted. Hence the bottom line is, trends indicated by ratios are of great importance in making valuable predictions. Therefore in ratio analysis, it is meaningless to consider the performance of a company on year or not comparing the ratio with other companies. Hence to make ratios meaningful you've got to compare it with previous year's ratios and even compare with your competitors.

Consequently, in this analysis the financial performance of Hammerson plc will be evaluated and discussed considering the two latest years of Hammerson financial statements that is 2008 and 2009.This will be done using its ratios classified under profitability, efficiency, investment and liquidity. In this same analysis attention will be given on the limitations of ratio analysis being used as a tool to evaluate the financial performance of Hammerson. As a source of research, more light will be given as a forecast for Hammerson profit warning and special events; this is to buttress this analysis.

Subsequently, ratios drawn from balance sheets, cash flow statement and profit and loss statement will be calculated.

Hammerson PLC

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Liquidity ratios                                       2009                                            2008

Current ratio:

Current assets                                           374.7                                          190.3

Current liabilities                                       280.8                                          253.8

= 1.3 to 1                                     = 0.7 to 1

Acid ratio:

Currents assets- stocks the same as current ratio since no stocks

Current liabilities

Investment Ratios

Earnings per share (EPS):

Earnings × 100                                      575 ×100                                    421 × 100

Shares                                                      136.8                                             426

=136.8p                                       = 98.8p

Earning yield:

EPS × 100                                       136.8 × 100                                       98.8× 100

Price per share                                       334                                                    277

= 40.95%                                           = 35.66%

Dividend per share (DPS):

Dividend                                             42.7 × 100                                       46.7 ×100

Ordinary share capital                         174.2 × 4                                             72.7 × 4

= 6.1 p                                            = 16.1 p

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Dividend yield:

DPS × 100                                           6.1 × 100                                          16.1 ×100

Price per share                                          334                                                   277

= 1.82                                                =5.8

Price/ earning ratio:

Price per share                                           334                                                   277

EPS                                                           136.8                                                 98.8

=2.44                                               = 2.8

Efficiency ratios                                        2009                                                2008

Debt ratio:

Total liabilities                                             2719.4                                               3484.2

Total asset                                                   5337.1                                               7485.7

= 0.5                                                  = 0.47

Equity ratio:

Shareholder funds                                         2546.7                                                2820.6

Total assets                                                  5337.1                                                 7485.7

= 0.477                                                = 0.376

Debt to equity ratio:

Total debt                                                    2626.1                                                     3339.6

Shareholder funds                                         2546.7                                                     2820.6

= 1.03                                                      = 1.18

Total debt to total asset:

Debt + current liabilities × 100              2626.1 + 280.8 × 100                             3339.6+253.8 ×100

Total assets                                                   5337.1                                                     7485.7

= 54.47%                                                 = 48%

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According to Glautier E and Underdown B, company financial performance has two aspects which are of interest to investors. Firstly, the financial performance may be assessed by reference to its ability to generate profit hence in this case ratios of financial efficiency focus on profit and sales and profit and assets employed. Secondly, the company's financial performance may be assessed in terms of the value of its shares to investors hence ratios of financial performance focus on earning per share, dividend yield and the price/earning ratios.

In this light and in accordance with the liquidity ratio, Hammerson current assets were more sufficient to cover its current liabilities by a factor of 1.3 to 1 in 2009 but dropped drastically in 2008 wherein Hammerson current assets were not able to cover its current liabilities. An inspection of the equity falling due within one year shows the second largest item after share premium is for reserves (£854, 700, 000 at 30th June 2009 and £ 68, 800, 000 for 30th June 2008). Hammerson had £68, 300, 000 of cash at bank on the 30th of June 2009 and £38,300, 000 on the 30th of June 2008, a reduction of £30, 500, 000, so it could appear to have enough cash at the end to pay for its reserves. Apart from reserves Hammerson had accruals as well,£ 21, 300, 300 for 30th June 2009 and £21, 600, 000, this shows a reduction of £300, 000, So we can assume that considering Hammerson cash at bank could cover both reserves and accruals. However, the item share premium was rather going to reduce Hammerson cash at bank. Apparently, Hammerson appears to have invested well because the cash flow statement shows that £264, 200, 200 for 30th June 2009 and £74, 100, 000 for 30th June 2008 as closing cash and deposit. This definitely had a valuable effect on the cash flow in both years.

Looking at the efficiency ratio, there is an increase from June 2008 to June 2009 in Hammerson ability to protect its creditors and how they can continue to trade on equity. The equity ratio of 0.376 for June 2008 and 0.477 for June 2009 hence we can say Hammerson can increase their extent of trading on equity because it's profitable. But the gearing situation of Hammerson is poor hence showing they have to borrow less and increase the capital invested by their shareholder. The trend of the gearing situation for the two years shows that its unprofitable relying on borrowings. This truly seen by the percentage of funds Hammerson provided by creditors that is 48% for 30th June 2008 and 54.47% for 30th June 2009.

There has being an increase in Hammerson profitability shown by an increase in its earnings per share of 136.8p (increase30th June 2009 and 98.8p for 30th June 2008). Unfortunate the Price/earning ratios has dropped from (2.44 to 2.8). Looking at the dividend (42.7 at 2009 and 46.7 at 2008) hence showing a drop on the dividend thereby literally proving that the company has had a policy of only paying a small proportion of dividends. This could therefore bring pressure from shareholders to increase the level of dividends paid out but obviously the impact on cash flow would have to be considered very seriously.

Accounting to Dyson, he suggests that the four methods of ratio analysis are interconnected. He thinks so because a highly efficient company is also a profitable one but it is also suggested that its success has caused it to run into cash flow problems. The market will access its future performance and hence its investment potential. Hence the investment ratios should reflect satisfactory profitability indicators or any liquidity problems. Even though all the indicators are satisfactory, the investment indicators may be weak, possibly because the market thinks that the company has passed its peak.

Although ratio analysis is a tool used to evaluate the financial performance of a company, it's got some pitfalls/limitations which are essential in this analysis. When we take a look at the financial statement provided by Hammerson it has been summarised leaving off the profit/loss statement making it impossible to calculate any of the profitability ratios hence it does not give a true picture of the company.

Also, if ratio analysis is used to two companies there becomes a problem as no two companies will have the same financial and business risk profile hence ratios can't be used to evaluate the performance of the two companies. For instance, one company may be able to obtain bank loans at reduced rates and may show high gearing levels while as another may not be successful in obtaining cheap rates and it may show that it is operating at low gearing level.

The changes in accounting standards also act as limitation to ratio analysis because different accounting standards offers standard ways of recognising, measuring and presenting financial transactions. Any change in the standards will affect the reporting of company and eventually its comparism of results over different years. This has the same with different accounting policies that is the choice of accounting policies may distort inter company comparisons. For instance IAS 16 allows assets to be based on either revalue amount or at depreciated historical cost. The business may opt not to revalue its asset because by doing so the depreciation charge is going to be high and will result in lower profit.

Decision making is not poor taking into consideration the historical cost. This is because where historical cost convention is used; asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decision making. Moreover, ratio analysis can not be used in cases where different companies have different capital structures and sizes. To make comparison when one is completely equity oriented and the other is a geared company, it becomes difficult to make a comparison.

Price changes also have a role to play as far as the limitations of ratio analysis are concerned. Inflation renders comparisons of results over time misleading as financial figures will not be within the same levels of purchasing power. Changes in results over time may show as if the enterprise has improved its performance and position when in fact after adjusting for inflationary changes it will show the different picture. As a conclusion, Ratio analysis is useful, but analysts should be aware of these problems and make adjustments as necessary. Ratios analysis conducted in a mechanical, unthinking manner is dangerous, but if used intelligently and with good judgement, it can provide useful insights into the firm's operations.

The chairman said, "The first half of the year was a period of vigorous activity following which the company is now in a strong financial position. Looking forward, we will focus on the four key areas. . First, our investment portfolio is of the very highest quality, comprising prime retail and office assets in the UK and France. We will actively manage the portfolio to improve the income and ensure it is well positioned to benefit from a recovery in markets. Second, our recent developments have the potential to be some of our best performing assets over the medium-term, and we will continue to focus on letting the remaining space. Third, we are pursuing the planning and design elements of the development pipeline to ensure we can exploit these projects when conditions permit. Fourth, we intend to take advantage of opportunities presented by the current markets, including recycling capital into investments offering higher returns."

Hammerson are making encouraging progress in letting our major developments, the last of which, Union Square in Aberdeen, will open in the autumn. Approximately 67% of the scheme's rental income has been secured or is in solicitors' hands. In the City of London, 60 Thread Needle Street and 125 Old Broad Street are respectively 23% and 75% let, with a further 44% of income at 60 Thread needle Street in solicitors' hands. Gross income will grow substantially as a result of recently contracted leases at these and other developments. This is a fore cast Hammerson upcoming special events for this year. Also, Hammerson has received treats in its financial position considering the fact that is has got a drop in its profit level from 2008 to 2009; this is shown by a drop in its earning per share for the two year. Concerning Hammerson current share price of 379.97p showing a drop of 9p hence a treat to its future profits as well since there will be considerable drop in the number of shareholders that before.

In a final analysis and to conclude as well, I think ratio analysis is a good to evaluate the financial performance of a company but should take some facts into consideration when analysing. Moreover, the trend shown after the ratios were calculated was in slight accordance with the chairman statement concerning its profitability and investment of the two years in question.

### REFERENCE

J. R. Dyson (2005). Accounting for non- accounting students. The Prentice Hall, 6th Edition. p 275

M W E Glautier and B Underdown (2007). Accounting Theory and Practice. The Prentice Hall, 7TH Edition p 252

### BILIOGRAPHY

Elliot Barry and Elliot Jamies (2008) Financial Accounting and Reporting, (12th Edition) Prentice Hall

Wood, Frank and Sangster, Alan (2008) Business Accounting 1, (11th edition) Prentice hall.