Financial Ratio Analysis and Capital Budgeting - Assignment Example

PART ONE; Ratio Analysis Analysis of the company (FS7) 1. Profitability ratio Net profit margin It is evident that the net margin for the company depicts a decline trend since, the net margin for the 2014/15 is 0.041 and thus, it is volatile since, the dividend must be paid as much as the net profit margin remains fixed. Return on Equity The ROE depict a declining trend for the financial period 2014/15. The return on equity is 0.6 and 0.8 for the financial period 2014 and 2015. The implication is that the liquidity situation of the company is enhancing. Liquidity ratio Quick Ratio It is evident that the quick ratio for the company for the financial period ending 214/15 is 1.3 and 1.4. The implication is that the cash ratio for the company is improving each year and thus, the business depicts a growth in its liquid cash with regards to current liabilities. Cash Ratio The cash ratio for the company is 0.3 and 0.2 for the financial period 2014/15 correspondingly. The implication is that the liquidity state of the company is inadequate to meet its short term debt obligation as and when they fall due for payment[How13]. Current ratio The current depict a value of 2.9 and 2.7 for the financial, period 2014 and 2014 correspondingly. The implication is that the liquidity situation of the business is risky. This is due to the fact that the rate in which the business is in compliance with short debt is declining which pose a threat in the business effectiveness of working capital[Sco15]. 3. Liverage debt ratio Total debt ratio It is evident that the total debt ratio depict a declining trend since, the value of debt ratio is 0.24 for the year 2014 And 0.22 for the financial year 2015. This would mean that the leverage for the company is at risk. Long term debt ratio The long term debt ratio for the company is declining from the 2014 to 2015 with a value of 0.005 and 0.004 respectively. The implication is that when the long term debt ratio declines, the business will experience a decline in the proportion of long term debt to net asset[Ken06]. Times interest earned ratio It is evident that the time interest earn ratio for the company is growing from 19.2 to 12.9. This would mean that the capacity of the business of meeting the debt commitment is improving each financial period and hence, debt obligation is guaranteed in terms of repayment. 4. Asset Utilization Inventory turnover It can be observed that the inventory turnover for the business is growing each year. This depicts a value of 4 and 4.8 for the financial period 2014/14 correspondingly. This would mean that, the sales turnover for the business if effective and hence, the reported net profit will grow. Account receivable turnover It is evident that the account receivable for the company is growing since, the account receivable for the financial period 2015 is 11.8 while for the 2014 is 13.5. This would mean that the capacity of the business in ensuring that there is effective debtor’s collection is improving each year which is a sign of effective working capital[Ken06]. Account payable turnover It can be observed in the ratio analysis that the account payable for the business is growing from 3.8 to 4.5 for the financial period 2014 and 2015. This would mean that the ability of the company paying its debt is improving and thus, the company’s liquidity risk is managed. Analysis of the company (FS1) 1. Profitability ratio Net profit margin It is evident that the net margin for the company depicts a decline trend since, the net margin for the 2014/15 is 0.3 and thus, it is volatile since, the dividend must be paid as much as the net profit margin remains fixed. Return on Equity The ROE depict a declining trend for the financial period 2014/15. The return on equity is 0.055 and 0.11 for the financial period 2014 and 2015. The implication is that the liquidity situation of the company is enhancing[Uwe15]. Liquidity ratio Quick Ratio It is evident that the quick ratio for the company for the financial period ending 214/15 is 1.94 2.25. The implication is that the cash ratio for the company is improving each year and thus, the business depicts a growth in its liquid cash with regards to current liabilities. Cash Ratio The cash ratio for the company is 0.828 and 1.112 for the financial period 2014/15 correspondingly. The implication is that the liquidity state of the company is sufficient to meet its short term debt obligation as and when they fall due for payment. Current ratio The current depict a value of 4.688 and 3.933 for the financial, period 2014 and 2014 correspondingly. The implication is that the liquidity situation of the business is risky. This is due to the fact that the rate in which the business is in compliance with short debt is declining which pose a threat in the business effectiveness of working capital. 3. Leverage debt ratio Total debt ratio It is evident that the total debt ratio depict a declining trend since, the value of debt ratio is 2.30 for the year 2-14 And 2.05 for the financial year 2015. This would mean that the leverage for the company is at risk. Long term debt ratio The long term debt ratio for the company is declining from the 2014 to 2015 with a value of 0.122 and 0.06 respectively. The implication is that when the long term debt ratio declines, the business will experience a decline in the proportion of long term debt to net asset[Jae01]. Times interest earned ratio It is evident that the time interest earn ratio for the company is constant at 5.3. This would mean that the capacity of the business of meeting the debt commitment is constant at 5.3 and hence, debt obligation is guaranteed in terms of repayment. 4. Asset Utilization Inventory turnover It can be observed that the inventory turnover for the business is growing each year. This depicts a value of 1.6 and 4.7 for the financial period 2014/14 correspondingly. This would mean that, the sales turnover for the business if effective and hence, the reported net profit will grow. Account receivable turnover It is evident that the account receivable for the company is growing since, the account receivable for the financial period 2015 is 20.5 while for the 2014 is 10.7. This would mean that the capacity of the business in ensuring that there is effective debtor’s collection is improving each year which is a sign of effective working capital. Account payable turnover It can be observed in the ratio analysis that the account payable for the business is growing from 5.3 to 9.6 for the financial period 2014 and 2015. This would mean that the ability of the company paying its debt is improving and thus, the company’s liquidity risk is managed[Tes15]. Recommendations to adopt proposal 1 or not From the net present value appraisal in the excel work book, it can be observed that the proposal 1 depict a positive NPV of $78825. This is ideal since investment in this proposal would lead to positive returns. Proposal one was evaluated using the payback period which provide that that investment in this proposal will take 2,3 year to recover the capital invested in the company. The amount of recovery is very small and hence this investment is recommend since, an investment is assured of shortest time possible in recovery the invested capital[Wil15]. In appraising proposal one using the internal rate of returns, it was evident that the proposal will depict an internal rate of returns o 17% which is quite. The implication is that, investing in proposal one will guarantee 17% return. The amount of returns is quite as compared to cost of capital of 10% and hence, proposal one is ideal for investment[War15]. Bibliography How13: , (Davies, 2013), Sco15: , (Henderson, 2015), Ken06: , (Kaoma, 2006), Uwe15: , (Schuster, 2015), Jae01: , (Shi, 2001), Tes15: , (Tessa Hebb, 2015), Wil15: , (William Petty, 2015), War15: , (James, 2015), Read More