Financial Statement

Analysis:
Allen & Overy
Submitted By:

Jeremy Galang

Christian Paul Castillo

Jerome Mallare

James Lowrence Renia

Mark Jayson Tinio

Joriz Justin Vicencio

Eurie Molih Bernardo

Jasmine Rose Berioso

Rica Leinn Bulos

Bea Carisse Bundalian

Gerrah Evea Domingo

Vertical Analysis
By using vertical analysis, we determine that this firm has great capabilities in generating
profit because 26.6% of net sales are the firm’s Net Income. But when we use vertical analysis in
the previous year of the firm’s income statement, we saw that the firm’s Net Income is 32.24%
of its net sales, meaning that it went down of approximately 6% compared to last years’ net
income. This decline may be because the revenue is lower compared to last year, and also the
firm’s operating expense increased as well, making the company’s net income lesser that it is last
year.

Horizontal Analysis
The percentage decrease for cash and other cash equivalents is 22.25% this means,
liquidity of the cash decreased for the current year. This can also mean that the firm used more
cash to transactions or to settle debt making the cash and cash equivalents in the hand of the firm
to lessen.

The percentage decrease for due from partners is 58.21%. The percentage increase for
client and other receivables is 7.73% this means that the business had collected more receivables
this year than the previous year.

The percentage increase for intangible asset is 1445.45%. The percentage increase for
property, plant and equipment is 9.57%. This may be connected to the decrease of cash or cash
equivalents of the company. The firm maybe used the cash and cash equivalents on their hands
to purchase these additional assets. The percentage increase for investment is 200% this means,
the owners invested (cash or tangible assets) more for the current year. The percentage increase
for retirement benefit surplus is 5.26%

The percentage increase for the current liabilities is 12.60%. This means that the
company’s liabilities that needed to be settled in this year increased in comparison to the current
liabilities of the firm last year. The total non-current liabilities increased by 48.68% in the
current year which means that the company has more long term obligations than the previous
year.

Liquidity Ratio
Liquidity ratios are ratios that indicate whether a company's current assets will be
sufficient to meet the company's obligations when they become due. This helps measure pay debt
obligations and its margin of safety through the calculation of metrics.
Current Ratio

Current ratio is the quotient of current assets divided by current liabilities of the
company. The company has 2.75 current ratio; it means that the company has 3 euros worth of
current assets for every 1 euro of current liabilities. It has a whole number of current ratio which
is positive for the company. It can be seen that in two periods, the company has whole numbers.
But comparing the two years together, the company has a better current ratio in 2017 than in
2018.

Quick Ratio

Quick ratio or acid test ratio is a more strict violation of current ratio formula. It removes
Inventory and Prepaid Expenses from the numerator component. Only Cash, Receivables, and
Trading Securities will be left. A whole number quick ratio is preferred by every company. The
company has 2.75 quick ratio which means they had a capability currently maturing obligations
through its quick assets. Being said, the company has positive acid test ratios for the two years
concerned. But comparing both years though would reveal that the company was better off in
2017 than in 2018, acid test ratio wise.

Working Capital

Working capital is the difference between current assets and current liabilities. The
company has €616.20 that is something good. A positive working capital is preferred by
companies because it means that there is enough current assets to pay all of the current liabilities
of the company. A positive working capital is preferred by companies because it means that there
is enough current assets to pay all of the current liabilities of the company. There was a decrease
in working capital compare to last year meaning that the ability to settle debt is reduced.

Receivable Turnover

Receivable Turnover Ratio is an accounting measure used to measure or quantify how

many times in a year can a company collect its average receivables. This show how efficient a
company is at collecting debts. A high receivable turnover ratio means that the company is good
at collecting accounts receivables. In the case of Allen and Overy the receivable turnover is .50
times. It is low and is not good for the business. It means that Allen and Overy is not efficient in
collecting its average receivables. Comparing the computed A/R Turnover ratios for the two
years, it can be seen that the company has lower ratio for 2018. This can be attributed to a poor
performance from its collection department.

Collection Period

The Collection Period is the number of days between the day that the credit sales were
made and the day that the money was collected from the customers. A low receivable turnover
ratio means a longer collection period. In the case of Allen and Overy, it has a low, .50
receivable turnover that is equivalent to 723.27 days. Because of the low receivable turnover, the
collection period is almost 2 years which is really not good for the business. By showing a longer
average collection period for 2018, it means that the collection department need to increase their
efforts more to collect the company's receivables.

Operating Cycle

The Operating Cycle is the collection period and inventory turnover ratio combined. The
cycle starts from the day when the service is rendered until the day that the payment is received
by the business. The company is a service type which means that it does not have inventory,
therefore it does not have inventory turnover ratio too. So the collection period is also the
Operating Cycle which is 723.27 days that is still not good as it is almost two years. Comparing
the two periods will show that there was a setback in their operating cycle. It means that the
company needs to improve more.

Solvency Ratio
Debt to Asset Ratio

Debt to Asset Ratio or Debt Ratio indicates the percentage of assets that are being
financed with debt. As much as possible, current and prospective creditors would want a very
low debt to asset ratio. Since in 2017, 46.21% is the debt to asset ratio and 60.14% in 2018 it can
be seen that there is an increase in the debt ratio of the entity. It means that the company was
more solvent in 2017.

Debt to Equity Ratio

Debt to Equity Ratio calculates the weight of total debt and financial liabilities against the
total shareholders’ equity. It highlights how a company’s capital structure is tilted either toward
debt or equity financing. It means that smaller debt to equity ratio indicates a healthier solvency
position for the company. In 2017, the debt to equity ratio is 102.17% while in 2018 it has
150.88% debt to equity ratio. Comparing the debt to equity ratio of the entity for the two periods
concerned would mean that the company was more solvent in 2017 than it was in 2018.

Equity Ratio

Equity Ratio determines how well a company manages its debts and funds its asset
requirements. It indicates how effectively they fund asset requirements without using debt.
Investors tend to look for companies that are in the conservative range because they are less
risky. The higher the ratio, the stronger the indication that money is managed effectively and that
the business will be able to pay off its debts in a timely way. In 2017, the Equity Ratio is 45.23%
and 39.86% in 2018. The Equity Ratio of the both period shows that in 2017 the entity is all
around, stronger financially and enjoys a greater long-term position of solvency than it was in
2018.

Profitability Ratio
Profitability ratio is the capacity of the company to earn or to make profit. It is a way to
measure the performance of thr company. In Profitabilty ratio there are three (3) formulas used in
the analysis such as operating profit ratio, return on investment where it has two variations which
is the return on asset and return on equity, and lastly is the asset turnover ratio.

Operating Profit Ratio

Operating profit ratio refers to the measure of company's ability to be profitable based
solely on its performances or operations by excluding the financing cost of interest payments and
taxes. It means that the higher percentage of the ratio the better because you earn higher profit.
However, based on the analysis in this law firm, there is a decrease of 5. 53% from the year 2017
to 2018. This is considered negative to the firm. This means that there is a low profit earned
solely on the operations of the firm.

Return on Investment Ratio

It has two variations.

Return on Assets

Return on assets, shows the percentage of company's profit earns in relation to its overall
resources. In the analysis, it can be seen that there is a decline in the percentage from year 2018
where there is a 5.58% difference from the year 2017 to the year 2018. This is something
negative to the firm because it shows that there is a lower profit and a higher average total assets.
It means that is taking more assets to generate the same number of profits for the company.

Return on Equity

By using the return on equity ratio, we determine that this law firm has a low return on
equity or there is a decline in ROE by having 93.10% which is something negative or bad for the
business because it means that there is a low net income after tax and ROE measures how well a
business uses investments to generate earnings growth. A low ROE is a bad thing for the law
firm because its net income is low compared to equity because its performance is weak. A
company may rely heavily on debt to generate higher net profit, thereby boosting the ROE
higher. Still the goal of ROE is to have a higher return on equity.
Asset Turnover Ratio

Asset Turnover Ratio measures the efficiency of a company’s use of its assets in
generating revenue or income to the company. An asset turnover ratio or 1.38 means that in
every 1 euro worth of assets generated €1.38 worth of revenue. The higher the ratio, the more
“turns” the better. But in this law firm it can be seen that there is a slight decrease in the asset
turnover ratio. This is something begative for the law firm. This can be attributed to a smaller
revenue for the second year.