Financial Analysis for Associated British Foods - Admission/Application Essay Example

The current ratio of Associated British Foods declined from 1.51 to 1.23 in 2009 which implies that their liquidity has suffered slightly in the recent year. The company was in a better position in 2008 to fulfill the claims of short-term creditors with its current assets than in 2009.

It is a more conservative measure of liquidity and it includes all the current assets except inventory since it is considered to be the most illiquid among current assets. Again a declining Quick ratio confirms that the company’s liquidity has reduced and it might have faced a liquidity crisis in 2009.

This ratio shows the number of times the amount of account receivable is collected during the year. A high receivable turnover indicates that amounts receivable are being turned over quickly implying that the company has a tight credit policy and hence it can result in a low level of bad debts. Associated British Foods have increased its receivable turnover ratio to 7.88 from 7.50 indicating they are better managing their receivables and reducing the chances of incurring bad debt.

The average collection period of Associated British Foods has reduced from 48.66 days to 46.32 days indicating that its customers are paying their bills much on time as compared with the last year.

The inventory turnover ratio measures the number of times the stock is sold and replaced in a year. Associated British Foods' inventory turnover ratio in 2009 reduced from 8.48 to 7.50 indicating that their products are being sold at a slower pace as compared to the last year. It may also imply that they are holding an excess inventory in 2009 as compared to the previous year.

The Days in inventory ratio shows that on average how many days’ inventory remains in stock before it is sold to the customer. Associated British Foods' higher days in inventory ratio in 2009 (48.67 days) shows that their products are replenished at a slow pace as compared to the last year.

The Total Asset turnover measures the efficiency of a company's use of its assets in generating sales revenue. The total asset turnover ratio of Associated British Foods declined slightly to 1.08 in 2009 from 1.09 in 2008. Although the total asset turnover ratio declined slightly but yet it can have a large impact on ROE since it is one of the most important elements in Du Point analysis.

The financial leverage ratio is a solvency ratio and it measures a company’s reliance on debt as a source of financing. A higher ratio indicates that the company heavily relies on debt financing as a source of financing thus increasing the chances of being bankrupt. It also implies that creditors may prefer a company with lower Debt to Asset rate and it is much easier for these companies to borrow funds from creditors. For the above case, Associated British Foods Debt to Assets ratio increased to 1.73 indicating that they have become more leveraged.

The Times interest earned ratio measures the extent to which operating income can decline before the firm is unable to meet its annual interest expense (Brigham & Gapenski, 1994). In this case, the Associated British Foods ratio has declined as the firm generates 5.89 in operating income for every dollar of interest expense compared to last year’s 7.55.