Deep Water Experts Financial Ratio - Assignment Example

Deep Water Experts Financial Ratio Affiliation: Introduction Despite the many challenges that and opportunities in today’s market, countless business owners have the potential of finding ways of weathering the economic storm and be able to keep their business profitable. The basic instincts that the company’s management go for is finding ways of cutting costs or engage in activities of improving efficiency (Kimmel et al., 2011). To some extent, some business owners may end up benefiting from the activities of engaging in business expansion. Several ways exist of which a business may expand, with the most basic form being expansion that focuses on the current customer base and be able to adopt the present business’s offerings in a manner that fits the changing needs of customers. It is also possible to expand the business by introducing it to a new location, or by acquiring the competitor, or by moving into a related industry. For this assignment, the paper will calculate Dubai-based Deep Water Expert’s financial status in order to get a clear picture on the current financial situation of the company in order to determine its strengths and weaknesses towards expansion. Q.1 Deep water experts’ financial rations, 2011 and 2012, brief interpretation of the change in the company’s liquidity, leverage, asset management and profitability ratios. Liquidity ratio – it refers to the financial metrics that is subject to use when determining the ability of the company in paying off the short-terms debts obligations. In a general outlook, when the value of the ratio is higher, there is a larger margin of safety of which the company may use at covering its short-term debts (Berman et al., 2008). The ratio is used to determine the ability of a company to pay off its short term debts and current liabilities due. It is the ability of a company to convert its assets into cash to pay off its current liabilities and short term debt, also the long term debts when they turn current. Current ratio 2012 2011 The current ration increases from 2.7 in 2011 to 3.3 in 2012 this indicates an increase in the ability of the company to pay back its short term obligations. Acid test ratio 2012 2011 The acid test ration increases from 1.8 in 2011 to 2.2 in 2012,this company has high liquidity hence can meet its current obligations. Leverage ratio – Most companies will rely on having a mixture of the owner’s equity and debt in order to finance the operations. A leverage ratio is among the many financial measurements that assesses on how much capital the company collects through forms of debts (loans), or it also helps in assessing the company’s ability in meeting the financial obligations (Sagner, 2014). It assesses how a company pays off its obligation, whether through equity or by debts. High leverage ratio may indicate that a company is heading to bankruptcy, that is, they are not in a position to pay off its debts without adding debt while on the other hand low leverage ratio indicate the company’s ability to sustain it debts level and pay off its debts. Debt ratio 2012 2011 The debt ratio increases from 0.070 in 2011 to 0.072 in 2012 this indicates the ability of the company to finance its debt obligations. Debt to equity ratio 2012 2011 The debt to equity ratio decreases from 0.2 in 2011 to 0.14 in 2012 this indicates the ability of the company to finance its debt through equity. Asset Management ratios – Asset Management Ratios is a financial technique for measuring the success of the firm when it comes to managing its assets for the purpose of generating sales. It is also used in determining how well a company utilizes its assets to generate revenue (Adair, 2011). These rations are also subject to refer as Activity or the Turnover Ratios. High ratio means the company is using its assets well to make revue, low ratio means the assets of the company are not well used for the benefit of the company to make revenue (Hampton, 2011). Total Asset Turnover 2012 2011 The total asset turnover reduces from 0.13 in 2011 to 0.11in 2012 this indicates the company does not efficiently use its assets to convert them into sales Fixed Asset Turnover 2012 2011 Fixed asset turnover increases from 0.15 in 2011 to 1.43 in 2012 this indicates the company uses their fixed assets effectively to generate revenue. Profitability ratios – these are ratios that the company to determine their ability to generate earnings in relation to its sales, equity and assets (Kimmel et al., 2011). It determines the management of the company and its profitability. Return on equity ratio. 2012 2011 Return on Equity ratio decreases from 11 in 2011 to 10 in 2012 this indicates there is a reduction in the company’s ability to convert the shareholders equity into profit. Profit margin ratio 2012 2011 Profit margin ratio increases from 2.8% in 2011 to 5.2% in 2012 this indicates an increase in profitability of the company. Q2. Using The Financial Ratios For The Retail Industry (Sporting Goods) As A Benchmark, Determine Deep Waters Liquidity, Leverage, Asset Management And Profitability Ratios And Briefly Interpret Your Results. Liquidity ratio Current ratio For Deep water experts the current ratio is = 3.30 as calculated in Q.1 For sporting goods industry 1.43 Deep water experts have a high liquidity ration compared with the industry. Leverage ratio Debt ratio For Deep water experts the current ratio is = 0.072 as calculated in Q.1 For sporting goods industry 0.52 Deep water expert’s ability to finance its debts through equity is lower compared to the industry. Asset Management ratios Total Asset Turnover For Deep water experts the current ratio is = 0.11 as calculated in Q.1 For sporting goods industry IS 0.85 Sporting goods industry has efficiently used its assets to convert them into sales compared to deep water experts. Profitability ratios Profit margin ratio For Deep water experts the current ratio is = 5.2% as calculated in Q.1 Q.3 The Company is not ready for expansion through comparing it to other industry’s competitive ratios, although it can pay off its short-term debts, it is slow in utilizing its assets and making revenue through them. It has strength in its financial state, but it has a low ability to finance its debts through equity and to meet its obligations. The first reason as to why the company is not ready for expansion is that it may have chosen the wrong reasons for its expansion internationally. Through such forms of thinking, it may result in more new costs that will not deliver value to the company (Hampton, 2011). In this regard, the company needs to compare its financial ratios with the competitors in the market before venturing in expansion. From the above calculations, it is apparent that Deep Water Financial Experts is not performing well especially in Leverage ratio and in Asset management ratio. However, by having a higher liquidity ratio than that of the competitor, the company has the potential of paying off its short-term debts. Having the ability to pay off the short-term debts does not guarantee success through venturing in expansion. Recommendation Through evaluating Deep Water Financial Expert’s business performance, there is a lot of potentials for the business to expand on its entities abroad. In this regard, I would recommend the company into adopting a slow-build approach of expansion and be able to erode on the rival’s market share before it takes over the competitive edge. Even though this process may take edges to achieve, the company needs to have a complete understanding of the challenges that may result from expanding the business abroad. In this regard, I would recommend Deep Water Financials to consider allocating the level of investment, its strategy, its adoption techniques, and determine the effective time that it requires being able to succeed. Therefore, the company should instead plan for a long-term investment approach in the region instead of focusing on a short-term winning strategy. References Adair, T. A. (2011). Corporate finance demystified. New York: McGraw-Hill. Berman, K., Knight, J., Case, J., & Berman, K. (2008). Financial intelligence for entrepreneurs: What you really need to know about the numbers. Boston, Mass: Harvard Business Press. Hampton, J. J. (2011). The AMA handbook of financial risk management. New York: American Management Association. Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: Tools for business decision making. Hoboken, N.J: Wiley. Sagner, J. (2014). Working Capital Management: Applications and Case Studies. Hoboken: Wiley. Read More