Company Performance - Current and Quick Ratio - Essay Example

Task Company Performance Paper Current ratio This is the ratio of assets to the liabilities in a company. It is calculated by dividing the sum of current assets in a company by the amount of current liabilities the company owes their creditors. It aims at ascertaining the liquidity of the company in comparison to the competitors in the market (Banjerjee, 2005). Thus, it is calculated as, Current Ratio= Current assets/Current liabilities= Current ratio. The current ratio for the company is 3.51 in comparison to the industry’s 1.97. This means the company is performing relatively well in comparison to their competitors in the industry who have lower ratios. Quick ratio This ratio is also referred to as the acid test ratio. It is calculated by getting the difference of the current assets from the value of our stock and any prepayments the company has made. Their total is then divided by the totals for the current liabilities to get the quick ratio (Needles and Powers, 2010). In other words the formula for calculating the quick ratio can be given as, Quick Ratio= Current asset-(stocks + prepayments)/Current liabilities. The company’s quick ratio is 2.01 compared to the industry’s ratio which is given as 1.35. This implies that MFB is performing better than most firms in the industry. Debt to Equity Ratio (Total Debt) This is the ratio of the company’s current debt to the amount of capital they have invested in the company. This is calculated by dividing the total debt that a company owes their creditors to the amount they have invested in the business (Banjerjee, 2005). It is given by, Total Debt = Debts/ Total capital. The company has a total debt ratio of 30.25 in comparison to the industry’s 31.96. This implies that there are other companies that have greater debts than it since their value is less than the industry’s. Inventory Turnover This ratio is also referred to as the stock turnover and is the ratio of the sales a company makes in a certain trading period to the totals of their inventories. It is calculated by dividing the total number of sales made in the period over the total recording’s of sales made (Clarke, 2002). Thus, it is calculated using the formula, Inventory Turnover = Sales/ Inventory. The company has a sales turnover of 3.53 in contrast to the industries 4.15. This means the company is performing dismally when compared to the industry since their indexes are lower (Banjerjee, 2005). Receivables Turnover It is a measure used in accounting to quantify the effectiveness of a firm in giving out credit facilities along with the collection of debts. It is a ratio that describes the level of activity within an organization (Clarke, 2002). It is calculated using the formula, Receivables turnover = net credit sales/average accounts receivable. The company has a receivables turnover ratio of 7.52 which is low compared to the industry’s 19.51. This implies that the company should make a reassessment of their debt collection policies to ensure their money has been collected and is bringing gains to the firm. Total Assets Turnover This is the ratio of the sales the company makes over the total value of their assets. It describes the relation between the company’s assets and their income (Slatter, 2006). It can be found using the formulae, Total Assets Turnover = Sales/Total Assets. The company has a higher asset turnover ratio than the industry having an index of 1.51 in comparison to the industry’s 0.94. This implies that the company has a low profit margin and this is the reason their turnover is high. They should use better pricing strategies. Net Profit Margin This is the ratio of the net profit margin a company makes in their sales. It is calculated by dividing the net profit the company makes by the number of their total sales (Clarke, 2002). This is given by the formulae, Net Profit Margin = Net Profit Margin/Sales The company has a net profit margin of 7.16 in contrast to the industries index of 4.64. This implies that the company’s profitability is higher than the industry’s and is an advantage for the company. Return on Assets This is the ratio that is used for indicating the level of returns that a company is making from their assets. It is calculated by adding the net income a company generates to the expenses they incur in the payment of interests (Banjerjee, 2005). The total found is divided by the total assets to get the value of the returns. It is thus calculated as, Return on Assets = Net Income + Interest Expense/Total Assets. The company has a higher return than the industry which is 10.81 when compared to the industry’s 5.87. This implies the company is making appropriate returns on their investments. Return on Equity This ratio shows us the amount of returns a company makes using their shareholders contributions (Slatter, 2006). It is usually expressed as a percentage and is calculated using the following formula, Return on equity = Net Income/ shareholders equity. The company has an index of 20.82 in contrast to the industry which has an index of 11.33. This implies that the company is more profitable than the other firms within the Price to Earnings Ratio This is a ratio of the price per share that a company issues to their shareholders of the company in comparison to their respective earnings. It is calculated by dividing the price of a share by the earnings it brings to the company (Clarke, 2002). In other words, it is calculated using the following formulae, Price to Earnings Ratio = Price per Share/Earnings per Share The company has a price to earnings ratio of 9.64 which is lower to the industry’s index of 26.89. This implies that the investors do not expect to get higher returns on their investments than their counterparts in the industry. Market to Book Ratio This is a ratio that compares the prices of shares at the current market and their values when they were being issued. This is also referred to as the shares book value. It is calculated by dividing the market price per share issued by their book values (Slatter, 2006). In other words it is calculated using the following formulae. Market to book ratio = market price per share/book value per share. The company has a market to book ratio of 1.78 in comparison to the industry which has an index of 2.36. This implies the company’s shares are making less when put in comparison to other firms in the industries. The returns will also be lower than what other shares give. Conclusion The liquidity of the company is fairly good as shown by their cash and quick ratio’s which are higher than the industries (Clark, 2002). However, the company gets poor returns on their inventories and profits from their assets while at the same time relying less on debts. This trend is shown by the value of their debt equity ratio. The company experiences a high net profit as a result of deductions in their expenses and also gets higher returns on their assets and capital. The values for their shares have decreased as is shown by their price and market ratio’s which are lower than the industries. These could be caused by the use of inappropriate management policies and accounting procedures. The company has their strong points in their liquidity levels where their performances are good. Other areas such as their returns and share values are dismal and need improvement to cope with the industry (Slatter, 2006). References Banjerjee, B. (2005). Financial Policy and Management Accounting. London: PHI Learning Pvt. Ltd. Clarke, P. (2002), Accounting Information for Managers. London: Cengage Learning. Needles, B and Powers, M. (2010). Financial Accounting. London: Cengage Learning. Slatter, S. (2006). Advances in International Accounting. Brussels: Elsevier Publishers. Retrieved on November 21, 2011 from: Read More