Finance Analysis - Assignment Example

REC Company The REC company is a well established retailer of recreational equipment and clothing. The company has been operating effectively for the past 5 years and it seems that it would continue to do so if the environment and all other factors remain constant. The following issues for the company are addressed below:1. As a banker, it would be a bit risky to extend a new credit worth $1.5 million to the company. Although the company seems to be good with paying the amount due on its long-term commitments as displayed in their Cash Flow statement, there is a risk that the company may face cash problems in the future.

The company’s debt to total assets and the debt to equity ratio clearly shows that the company has been keen towards loan finance and currently the company’s debt as a percentage to its total has exceeded over 50%. The company’s quick ratio portrays a falling trend. This reduction in the quick ratio suggests that the company may face problems in paying of its obligations as they fall due, this can be because of an increase in debt obligation and a reduction in the ability to convert stock into cash (as shown by the inventory turnover ratio).2. Assuming that the share price for REC company is $30, the company’s P/E ratio in the year 2004 would be 15.3 (30/1.96 (Market price per share/ EPS)).

This P/E ratio can be considered to be good with respect to the clothing industry, hence it can be deduced that a $30 price per share for the REC company is the best value for money for an investor (Yahoo Finance, 2011).3. The days payable outstanding ratio for the REC company is 41 days. This collection period is higher than the industry average, hence it clearly suggests that the wholesaler would be paid in comparison to the industry trend. As a wholesaler, this would not be amusing and would result in selling shoes to other retailers rather than REC company, who would pay a bit earlier i.e. in line with the industry average of days payable outstanding ratio.4. As a recent college graduate, I would definitely join the company as the company seems to be a good learning prospect.

The company operates in two different industries i.e. recreational equipment and clothing hence it would provide good learning exposure for me. The company’s finance department seems to be operating efficiently, considering the financial statements and the ratios prepared by the finance department. The financial statements seem to prepared after considering the relevant accounting and financial standards hence it the seniors within the finance department would provide great learning for me as a fresh finance graduate.5. The company has been performing good for the last five years and it is considered that the company would grow.

As the CFO of the company, I would definitely want to authorize the opening of 25 new retail outlets within the next 2 years but this expansion would require much greater financing. This finance would only be available if the company improves its quick ratio and repays some of its debts on a constant basis so as to reduce the gearing ratio of the company. Works CitedYahoo Finance, “Industry average”, Yahoo.com, 2011. Web. 28 Dec. 2011Available at: http://biz.yahoo.com/p/industries.html