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Ratio Analysis - Essay Example

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being provided by the accounts office. The analysis was performed in order to notify the management of the prospective external…

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Riordan Manufacturing Company Ratio Analysis Memo of the of the Teacher: Accounting II Submitted: 28 February2014
Name of the Institution:
To: CEO, Riordan Manufacturing Inc.
From: Accounting Department
Dated: 26 February 2014
Subject: Ratio Analysis
The major purpose of this memo is to outline the recent horizontal and vertical analysis of the ratios completed on Riordan Manufacturing Inc. being provided by the accounts office. The analysis was performed in order to notify the management of the prospective external interests. The analysis was made so that any external investors who might be interested in the company are able to utilize the calculated ratio results to determine Riordan Inc’s performance and its most updated financial position and strategy. The discussed liquidity ratios of the company are the current ratio, acid test ratio and inventory turnover. They are of interest to the creditors to determine the firm’s ability to meet its short term financial obligations. So far the liquidity ratio of the company indicates that the liquid assets of the company are higher compared to its own average, meaning that the company as assets that can be easily be converted to cash. The indication of good liquidity ratio reduces the worry of the creditors since the business is at a position to easily pay its short term liabilities.
Profitability ratios concentrate on the major areas such as asset turnover, profit margin, return on assets, and return on common shareholder’s equity. Profitability ratios are used by investors to measure the management effectiveness as shown by returns generated by the profit margin (Weygandt et al, 2010, p 723). The company’s ROE has been registering a slight decrease, from 17% in 2009 to 15% in 2011, meaning that the company is earning less returns on its capital. As calculated the highest profit margin is 4.97% in 2011 which is low, meaning that the business is not that profitable. The solvency ratio of the company is based on debts to total assets and times interest earned. It is used by shareholders and potential investors to determine financial risk of the business. When calculated in 2011 debt to total assets is 23.33% which gives a healthy indication of the company’s performance. During the same year the times interest was 8.3% which backs the claims of the company’s financial healthiness. Therefore from the solvency ratios the management can learn that the company is capable of paying back its long term obligations (Weygandt et al, 2010, p 727).
References
Weygandt, J.J.; Kieso, D.E. & Kimmel, P.D.(2010): Financial accounting 7th edition. Chapter 13: Financial Statement Analysis, Hoboken, NJ: John Wiley & Sons. Read More
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