Financial Analysis of the Company - Example

Name of the student: Course Tittle: Name of the professor: Date 1.0 Abstract This paper discusses the financial strength of the company in the month of August using various financial rations. It also discusses the history of the company performance for the last six months before concluding with the recommendations. 2.0 Financial analysis of the company in August Calculate as many accounting ratios as possible for the month of August and explain what these ratios mean in terms of evidence From the graph of the month of August the following accounting ratio can be calculated; 1. Gross profit Margin- It is profit realized after accounting for cost of sales. (Collier 2003). It reflects the ability of the business to increase sales by either increasing the volume or price as well as reduce cost Gross margin = Gross profit Sales Sales = 9150 Cost of goods sold = 7560 Gross profit = 1590 Gross profit Margin = 1590/9150 = 17.377% A figure of 17.377% is an indication of relatively a good profit from the company. Since this is only one point indication, we can conclude that the company is performing relatively well. 2. Net margin- is the profit after all deductions; it seeks to assess the profitability of sales that is the efficiency of sales as a critical event in generating income. It shows the prudence in the management of expenses (Collier 2003). From the Simventure result, Net margin % (or Return on Sales) = Profit after Tax Sales = 1142/9150 = 12.48% From the calculation, 12.48% shows that the company is reasonable in controlling their expenses and it shows reasonable profit margin. The ratio of net margin on sales varies widely from industry to industry, so that it should be used solely for comparing the performance of the same company over a period of time. Some companies may operate. 3. ROCE- The return on capital employed ratio is an indicator of how effective a company’s assets are at generating earnings. In other words, the ratio indicates the amount of earnings a company is able to generate from invested capital, thus enabling investors to forecast the company’s profitability in an industry. Expressed as a percentage, ROCE = Profit before interest and tax Total Equity + long term liabilities = PBIT = 1440 = Equity and Liability = 24000 = 1440/24000 = 6% Based on the month of August ROCE is 6%. This indicates that although the company is not currently generating optimal earnings from its investments, it has the potential to utilize its assets to boost profitability. 4. Return on Shareholders Funds (ROSF) – this is used to measure the company ability to reinvest resources for income generation. The ratio is calculated by dividing net income by total equity, enabling investors to know the efficiency with which company assets are being used to generate revenue. Return on Shareholders Funds (ROSF) = Profit after Tax Total Equity = 1142/14120 = 8% The higher the ROSF the better a company is at utilizing resources for revenue generation, hence the more profitable the company is likely to become. With ROSF of 8%, the company is relatively performing better but not to the expected target. 5. Current ratio - the current ratio is used to measure a company’s ability to meet its short-term financial commitments, without threatening its financial stability. The ratio relies on the company’s current assets and current liabilities, since it is believed that a company should use its short-term assets to meet short-term liabilities (Carey and 2001). Current ratio = Current assets Current liabilities = 4520/3870 = 1.168 Current ratio of less than 1 is a bad sign for the company’s survival, since it indicates that the company may not be able to meet its current liabilities. From the analysis, the current ratio is 1.168, though is above 1 mark, it shows that the company is not performing quite well in terms of liability management 6. Acid test - The acid test ratio takes only those current assets that are readily convertible to cash i.e. it excludes inventory (Carey and 2001). Essayyad. The Quick (or Acid Test) Ratio is a more effective indicator of liquidity as it only takes into account the most liquid assets (cash and net accounts receivables in this case) and does not take into consideration current assets that are considered as less liquid including inventory and office supplies Acid test = Current assets minus stocks Current liabilities = (4520-950) 3870 = 3570/3870 = 0.92248 The ratio of 0.92248 shows that the company is not liquid enough to meet it short term obligation one need arises hence the company should improve on this. 7. Asset turnover- This is an asset utilization ratio. If the firm has a low ratio of sales to assets, it is implied that some substantial under-utilization of assets is occurring, or alternatively that assets are not being efficiently employed. This ratio focuses therefore, on the use of assets made by the management. Asset turnover = Sales Total assets = 9150/24000 = 0.38125 times With low asset turn over of 0.38125, it shows that the company is utilizes most of its assets in generating sales which is good for the company. 8. Debtor payment time – This is the average time taken by debtors to pay for their debts Debtor payment time = Period end debtors x 365 Sales = (300X365)/9150 = 12 days With the debtor’s payment time of only 12 days, this shows that the company has strong credit policy which allows the company to collect cash faster and within a short time. 9. Creditor payment time - the Creditor payment time gives us how number of days taken before payments are made to creditors Creditor payment time = Period end short term creditors x 365 Cost of sales = (400X365)7560 = 19.31 days Credit payment is higher that debtor’s payment period hence this is a good policy for the company. 10. Gearing ratio – Gearing ratios is referred to as a measure of the organization’s ability to service its debts that are eventually expressed as a percentage. The higher the ratio the better the company is performing. Gearing ratio = Long term debt Equity + long term deb = (400/18200) = 2.2% From the result, the company is performing below the expect target which is not a good indication for the company. 3.0 Company history in the past six month The six months analysis of the company shows the company has been in a downward trends in terms of its activities, the sales has improved from January to June where January sales income was $466 and this has increased to $9000 in June but has a result in increase in overhead cost, the company loss has increased from -614 to -2358 in February but there after the company improved and net profit in June was $ 2062 The debtor’s management has also decreased for the six month but it has picked in the two months following the implementation of new credit policy. 4.0 Recommendation The company sales has improved except that the net profit margin is low, this might result from overhead cost which the company management can improve. Credit management policy for the last month is quite impressive and the company should continue in the same manner The management should improve on the return on the owners fund to boost the investors confident otherwise the company is in the right direction. Reference Carey, O. & Essayyad, M., (2001). The essentials of financial management. New York: Research & Education Association Collier, P. (2003). Accounting for Managers: Interpreting Accounting Information for Decision-Making. New York: John Wiley and Sons. Read More