Financial Statements, Liquidity Ratios - Assignment Example

Part A Current ratio Purpose: “To calculate the firm’s ability to pay its short term obligation using short term assets”. (Keith, 2009) Ratios Formula 2007 2008 2009 Current Ratio Current Assets/ Current Liabilities 2730/1893=1.44 2890/1732=1.67 2915/1843=1.58 Quick Ratio Purpose: “To calculate the firm’s ability to use its near cash or quick assets to retire its current liabilities”. (Keith, 2009) Ratios Formula 2007 2008 2009 Quick Ratio (Current Asset - Inventories) / Current Liabilities (2730-1470) / 1893 =-66 (2890-1360) /1732=.88 (2915-1260) /1843=.9 Asset Turnover Ratio Purpose: “To calculate how effectively the firm has been able to use its assets”. (Martin, 2008) Ratios Formula 2007 2008 2009 Asset Turnover Ratio Net Sales/ Total asset 10790/11200= .96 11570/11930=.97 12680/13130=.97 Receivable Turnover in days Purpose: “It measures the firm’s ability to rotate its debtors and measure the liquidity of the assets”. (Martin, 2008) Ratios Formula 2007 2008 2009 Receivable Turnover in days 360/(Credit sales/average accounts receivable) 360/(7255/(660+690/2)= 33.5 360/(7110/(710+690/2)=35.47 360/(7085/720+710/2)=39.4 Inventory Turnover in days Purpose: “To calculate the number of times in an average an inventory is sold in a year”. (Martin, 2008) Ratios Formula 2007 2008 2009 Inventory Turnover in days 365/(Cost of goods sold/ average inventory 365/(5995/(1510+1470/2)=90.8 365/(6360/(1360+1470/2)=81.1 365/(6980/(1260+1360/2)=68.5 Debt ratio Purpose: “To calculate how much a firm relies on debt to finance its assets”. (Kennon, 2009) Ratios Formula 2007 2008 2009 Debt Ratio total debt/ total assets 5293/11200= .47 5282/11930= .44 5643/13130= .43 Equity Ratio Purpose: “To calculate how much a firm relies on equity or shareholders fund to finance its assets”. (Kennon, 2009) Ratios Formula 2007 2008 2009 Equity Ratio Total equity/ total assets 6647/11200= .53 6648/11930= .56 7487/13130= .57 Debt Equity Ratio Purpose: “To calculate the extent to which a business relies in external financing”. (Kennon, 2009) Ratios Formula 2007 2008 2009 Debt to Equity Ratio Debt / Equity 5293/6647= .80 5282/6648 = .80 5643/7487 = .75 Interest Coverage Ratio Purpose: “to calculate the firm’s ability to pay interest on outstanding debt”. (Little, 2009) Ratios Formula 2007 2008 2009 Interest Coverage Ratio Operating Profit before tax and interest/ Interest 2320/408= 5.69 2385/426= 5.6 2405/456= 5.27 Return on Assets Purpose: “To calculate how effectively the firm has able to generate profits with the assets”. (Little, 2009) Ratios Formula 2007 2008 2009 Return on Assets (Net Income / Total asset) * 100 (1604/11200) *100= 14.32% (1670/11930)*100= 13.99% (1684/13130)*100= 12.83% Return on Equity Purpose: “To calculate the firm’s ability to generate additional income by reisvesting the earnings”. (Little, 2009) Ratios Formula 2007 2008 2009 Return on Equity Net Income/ Shareholder Equity 1604/6674= .24 1670/6648= .25 1684/7487= .23 Gross Profit Ratio Purpose: “To calculate the firms manufacturing and distribution efficiency during the production process”. (Kennon, 2009) Ratios Formula 2007 2008 2009 Gross Profit Ratio Gross Profit/ Net sales 4795/10790= .44 5210/11570= .45 5700/12680= .45 Expense Ratio Purpose: “To calculate the percentage of money a firm spends on expenses out of the total sales generated”. (Little, 2009) Ratios Formula 2007 2008 2009 Expense Ratio Expense/ Net Sales 2475/10790= .23 2825/11570= .24 3295/12680= .26 Net Profit Ratio Purpose: “To calculate the firm’s ability to generate profits on each dollar of sales”. (Little, 2009) Ratios Formula 2007 2008 2009 Net Profit Ratio Net Profit/ Net Sales 1604/10790= .15 1310/11570= .11 1684/12680= .13 Earnings per Share Purpose: “To compare the performance of one company with other assuming that both company performs in the same industry so that investors can choose the company to invest in”. (Little, 2009) Ratios Formula 2007 2008 2009 Earnings per Share Net Earnings/ Outstanding Shares 1217/2500= .49 1398/2500= .56 1017/3500= .29 Part B Financial statements are prepared by organizations. A look at the financial statements reveals little. An analysis of ratios helps to predict future. It gauges the performance. It determines the direction. It helps to prepare strategies. It helps to compare companies. This facilitates comparison. It also helps to compare with the industry. Some of the measures and growth are shown below Liquidity Ratios “It determines the ability to pay its short term debt”. (Wild & Subramaniyam, 2008) Current ratio: The current ratio is 1.58 for 2009. It indicates good cash flow. It matches to the industry standard set which is 1.65. It shows the “firm is able to meet its commitment easily and short term creditors can ensure safety of fund”. (Kennedy, Ralph, Stewart & McMullen, 2008) This has been achieved due to good maintenance of inventory. Even receivable has been managed well. They have been rolled well. This is because of proper strategy. The company has good focus. It can still improve. This can be done by rolling receivable more. Quick Ratio: The quick ratio is 0.9. It is a worrying factor. The “firm is not able to match its current debt level when inventory is removed”. (Wild & Subramaniyam, 2008) It is also below industry standard of 1.2. It should have been at least 1. This would have made it at least sufficient. . “In the event that short-term obligations need to be paid off immediately, then the company would not be able to meet it”. (Martin & Fernando, 2002) This is because the company has lot of inventory. It has not been managed well. The turnover for stock is slow. It is because of poor stock maintenance. To improve it company needs to reduce stock. It needs to improve the turnover in it. It needs to have stock according to levels and reduce unnecessary investments in it. Activity Ratios “It is the ability to convert various accounts into cash or sales”. (Wild & Subramaniyam, 2008) It is determined by the following Asset Turnover Ratio: The ratio is .97. It shows good performance. It indicates “the firm has been able to utilize its assets properly to generate sales”. (Martin & Fernando, 2002) It also matches the industry standard of 1.05. It indicates “efficient utilization of fixed assets, which may be caused by proper capacity utilization or no interruption in the supply of raw materials and reflects good pricing strategy”. (Martin & Fernando, 2002) This is due to good strategy. The company has been efficient. It can improve its performance by efficiency. It can utilize its excess capacity to improve it. This indicates proper management. Receivable Turnover in days: It is 39.4 days. It is not such a bad situation. It is within manageable limits. The industry standard is 32 days. The company needs to match it. It implies that “the company has not been able to recover the balances due from its customer frequently and this may be due to improper credit management policy”. (Kennedy, Ralph, Stewart & McMullen, 2008) They need to improve it. This will help in increase sales. This can be done by better management. As, sales are increasing identifying proper customer will help. They need to make better strategies. This will help to improve receivable. Inventory Turnover in days: It is 68.5 days. It shows inefficiency. The company needs to match industry. The standard set is 58 days. It indicates “the company is not able to manage its inventory well”. (Martin & Fernando, 2002) It has improved from previous years. Still, it needs to improve it. It indicates that the strategy pursued now is working. This is due to the fact that the turnover is improving. Still, the firm needs to improve it. The problem for the company is “it opens the company up to trouble should prices begin to fall as company's current assets are tied up in inventory and the business does not have a relatively low turn rate (less than 58 days), it may be a signal that something is seriously wrong and an inventory write-down is unavoidable”. (Kennedy, Ralph, Stewart & McMullen, 2008) Still, looking at previous years it has improved. It needs to continue to do that. It will help to improve it. This will be due to efficient management. Financing Ratios “It shows the firm’s ability to pay its long term debt”. (Wild & Subramaniyam, 2008) Some ratios which indicate this are Debt Ratio: It is 0.43 for 2009. This ratio indicates efficiency. It matches the standard. The industry standard is 0.42. This indicates proper use of debt. It indicates that the company has matched the industry standard and debt financing is within limit. It shows that “the company is able to pay the interest and sum easily and has been able to manage the risk and tax issue properly”. (Martin & Fernando, 2002) The company has been able to save tax. The company needs to persist with it. This will make more people invest in the company. Equity Ratio: It is 0.57 for 2009. This ratio is sound. It matches the standard. The industry standard is 0.58. It shows proper use of self finance. It shows that “the company is able to produce good results for stockholders as the company earns a rate of return on assets that is greater than the interest rate paid to creditors”. (Martin & Fernando, 2002) It also shows efficient management. By doing so tax has been managed well and saved on it. The company needs to continue with it. This will make more people come for the company. It shows a healthy picture. Debt Equity Ratio: It is .75 for 2009. This ratio is sound. . It matches the standard. The industry standard is 0.72. It shows that “the company is paying interest and principal while obtaining more funding and indicates that a company has been aggressive in financing its growth with debt”. (Martin & Fernando, 2002) The company has done well. This is due to additional issue. Shares have been issued. This has helped. The company needs to persist with it. This will help the company to build reputation. This shows the company as favorable. Investors prefer it. The company needs to work efficiently and continue. They should continue the same way. Interest Coverage Ratio: It is 5.27 for 2009. It needs to be worked on. It doesn’t match the standard. The industry standard is 6.2. The company needs to improve. This is due to lot of debt. It shows “the company is burdened by debt expense”. (Kennedy, Ralph, Stewart & McMullen, 2008) It is below standard. Though it is able to pay debt it is worrying. This is due to improper means. The company needs to work on long term debt. This will help to improve. The company also needs to focus on it. This will improve the image. It will help in long relation. Profitability Ratios “It shows the ability of the firm to generate earnings as compared to the expenses and other cost during the period”. (Wild & Subramaniyam, 2008) The following ratios help Return on Assets: It is .13. It is very near the standard. The standard for industry is .17. It shows that “the company has generated good return on the assets but it needs to work on profits”. (Kennedy, Ralph, Stewart & McMullen, 2008) A high return is favored. The management needs to be efficient. This has been due to low profits. Other reason is inefficient asset use. It could also be having more assets. “It gives investors an idea of how effectively the company is converting the money it has to invest into net income”. (Kennedy, Ralph, Stewart & McMullen, 2008) The company needs to be more efficient. They can improve it by reducing assets. Increasing profits will also help. Better management to reduce cost will also impact. Efficiency is a key here. Return on Equity: It is 0.23 for 2009. It is a concern. It is below industry level. The company needs to improve it. It shows that “the return the investor gets is below par”. (Wild & Subramaniyam, 2008) it shows inefficiency. This ratio is due to additional issue. The company has issued shares. This has affected it. It might have done as it has long projects. It needs to improve it. Investors don’t prefer such company. The company needs to concentrate on core things. They need to cut cost. They also need to improve management. Gross Profit Ratio: It is 0.45 for 2009. It is sound. It matches the standard. The industry standard is 0.43. It shows that “the company's has manufacturing and distribution efficiency during the production process than its competitors and industry”. (Wild & Subramaniyam, 2008) This will result in “investors paying more for businesses than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.)”. (Kennedy, Ralph, Stewart & McMullen, 2008) This is a good sign. It has proper sales force. It needs to continue the same way to build its future. Expense Ratio: It is 0.26 for 2009. It is also good. It’s very close to industry. The industry standard is 0.23. This shows that “the company has control over cost”. (Wild & Subramaniyam, 2008) This is due to good management. The work force is efficient. The company has cost cutting ways. This is helping. The company can still improve. It needs to get more efficient. It needs to reduce unnecessary expenses. This will check it. It will bring it more under control. The lower it is the better it is. So, efforts should be used. Net Profit Ratio: It is 0.13 for 2009. It is sound. It matches the standard. The industry standard is 0.135. It shows that “the company’s indirect expenses are well under control and it is using the resources well”. (Wild & Subramaniyam, 2008) This will result in “investors paying more for businesses than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.)”. (Kennedy, Ralph, Stewart & McMullen, 2008) This is a good sign. The company needs to do this. It will improve image. It can also improve management. This will also bring better profits. The higher it is the better. The company needs to put in more efforts. It needs to move higher. More efficient handling will help. Earnings per Share: It is 0.29 for 2009. It is not a good sign. It is below standard. The industry standard is 0.58. It needs to work on it. It is below par. This is due to “the fact that company has issued additional share which is affecting the return”. (Martin & Fernando, 2002) Investors want higher return. It determines whether investor will invest. It doesn’t pose a healthy sign. The company needs to dole out more. It can be done by improving the earnings. This is because the earnings haven’t matched the increase in share. The management needs to handle it well. This will result in few takers. This is a worrying sign. Management needs to take step like reducing shares. This will improve it. Also improving earnings will help. This ratio shows the way Glenfiddich Corporation has fared. It is a mixed bag. It has done well somewhere. It needs to work on other areas. The company has good profits. The expenses are also well managed. It indicates good strategy. Issue of share has hampered. This has affected shareholders earnings. Overall the performance is good. The company is improving. Continuing the same way will help. The strategies are sound. Better management will help. Improving this process will reflect in better picture. References Kennon J, 2009, “Analyzing financial ratios”, Oxford University Press Keith L, 2009, “Analyzing an Income Statement”, Investing Lessons, New York Kennedy, Ralph D, Stewart Y & McMullen, 2008, “Financial Statement: Form, analysis and interpretation”, Hofferber Books Martin T, 2008, “Analyzing a balance sheet”, Tata McGraw Hill Martin F & Fernando A, 2002, “Financial Statement Analysis”, John Wiley & Sons Little K, 2009, “Understanding Earnings per Share”, the New York Times Company, New York Wild J & Subramaniyam K, 2008, “Financial Statement Analysis”, The McGraw Hill Company Read More