Financial Analysis for Abel Athletics - Essay Example

Analysis of Abel Athletics. Analysis and interpretations of financial ments For stockholders annual report Executive Summary. The financial performance of Abel Athletics for a one year period will be reviewed to be able to draw a presentation to the stockholders of the company. The period under review show figures from 2007 financial report and will be compared to the bench mark index of industry performance. A benchmark is a standard measurement that forms the basis for comparison. Conclusions on the study provide information wherein Abel Athletics should focus its future plans. The financial statement is a management tool that will allow us to understand company performance. From this, financial ratios could be compared with competitors and be able to understand its strength and weaknesses. Using the financial statements of Abel Athletics, the interpretations of ratios are arrived at and described after each table. 2. This portion of the study shows financial analysis on the comparability and position of the company in the industry index. Table 1. Profitability ratios Company Industry Average Return on assets: Earnings / Total Assets 23,.1% 21.50% Return on equity Earnings/equity 132.0% 125%` Net profit margin Earnings/sales 26.4% 25% Gross Profit margin Sales-COGS/Sales 58.2% 55% 1. Return on asset means for every dollar Abel Company has in asset investment, it is able to generate 23.1% revenue, which is much higher than the industry index. 2. Return on equity. ROE has similar interpretation, meaning that every dollar invested as equity will generate a 132% revenue, again stronger than industry average 3. Net profit margin. NPM measures how much out in every dollar of sales in a company is kept for earnings. A higher profit margin shows the company is profitable and is in better control of its costs as compared to its competitors.(Answers.com) Again here, Abel keeps 26.4% of its sales for earnings, again higher ratio than the industry. 4. Gross profit margin. The table shows that after deducting the goods sold, Abel has enough funds to support other expenses, such as 58.2% is left for operating costs and profit. Abel also has higher GPM than the industry index. * In terms of profitability based on ROA, ROE, NPM and GPM, Abel Athletics show better performance than the industry index. It is a good indication of growing company for the first year of operation. Table 2. Liquidity Ratios. Company Industry Current Ratio= Current ratio/current liabilities 1.45 1.25 Quick Ratio –(Current assets-inventory)/current liability 0.33 0.22 Net working capital ratio = Net working capital/Total Assets 29.6% 25.2% 1. Quick ratio: This is a measure to find out how Abel will be able to pay its maturing obligations without necessarily selling inventory and a higher ratio is considered better. If this ratio declines over time, or it falls below the benchmark index of the industry, this means the company may be investing too much capital on inventory, or it has taken up too much short term debt. (Investorwords) Abel shows a low quick ratio which is below 1, but still way above benchmark index. 2. Current ratio. This is also similar to quick ratio which consider current assets divided by current liabilities. A ratio of above 1 shows strength, and in this case Abel has more assets to cover obligations and is more liquid than the industry. 3. Net working capital ratio is a measure to find out if company is being able to pay off its short term liabilities. Abel shows a positive working capital which is much higher than the industry bench mark. This means company is able to pay short term liabilities with its current assets.(Investopedia) * On the basis of the ratios above, Abel is in a position to meet its maturing obligations on a short time basis, that is normally, one year period. Table 3. Activity Analysis Ratio Company Industry Asset turnover ratio = Sales/total assets 0.88 0.95 Fixed Asset turn over ratio =Sales/Net Fixed Assets 17.60 15.5 Equity Ratio =Shareholders equity/Total Assets 0.18 0./15 Average Collection Period 36.52 40 Average Payment period 58.25 25 Accounts Receivable Turnover ratio 9.99 8.8 Inventory turn over 0.50 0.4 Average age of inventory 728.1 675.2 1. Asset turn-over ratio. This ratio is useful to determine the amount of sales that are generated from each dollar of assets As a rule, companies with low profit margin tends to have high asset turnover, and a company with high profit margin has low asset turnover. Abel has a low asset turnover which is interpreted as having a high profit margin on its products. According to Investopedia asset turnover is a related to the price strategy of the company. 2. Net fixed asset turnover. The relevance of this ratio is by comparing its number to the competitor. According to CHA, a high asset turnover means that the company doesn’t have enough productive capacity to meet sales demand, or otherwise is using an obsolete equipment. Abel, in this case has higher turnover than competitors. (CHA) 3. Equity ratio – is the proportion of equity and debt the company uses to finance its assets. In our analysis, Abel uses only 18% equity in its capital investments, and relies on debts for funding. 4. Accounts receivable turnover is a ratio that measures how fast the company turns the receivables to cash. Abel shows a high collection ratio as compared with the industry. This ratio means the number of times accounts receivables are collected during the year. A low accounts receivable turnover ratio shows a collection problem which doesn’t seem to be a problem with Abel. (Bizwiz Consulting) * Focus of attention should be given on the internal activities of the company as it seems the company has low profit margin caused by high turnover of assets and too much debt. Company should also pay attention to the pricing strategy and production that could have caused the problem. Terms of payment should be reviewed as payment period is stretched to more than 30 days. Inventory is too high which explains the high turn-asset turnover. Table 3. Capital Structure and Debt Ratios Company Industry Debt Ratio = Total Liabilities/Total assets 82.55% 50% Debt to equity ratio = Long term debt/equity 97.4% 50%` Interest Coverage ratio = EBIT/interest 14.55 25.5 1. Debt ratio - This is a ratio showing the proportion of the firm’s asset that as been financed with borrowed funds. (Farflex) Abel’s debt ratio shows that 82.5% assets are being financed with borrowed funds and comparatively high with the industry sector. Due to this high ratio, Abel’s debt ratio indicates that it has very little opportunity to borrow funds in future. (Farflex) 2. Debt equity ratio. The 97.% debt equity ratio shows that the company has been aggressive in borrowing funds to finance its growth. Investors might find this a risky situation because of the high interest cost of borrowing which may result to unstable earnings of the company. (Investopedia) 3. The interest coverage ratio of Abel Athletics shows a low margin of safety in keeping up their outstanding debts. At a ratio of 14.55 lower than the industry, the company is troubled by debt expenses. An interest coverage ratio in determining the capability of the company to pay interest expenses on the outstanding debt. However, if it still declines to 1.5. or lower, its ability to meet interest expense becomes doubtful. * The capital structure of Abel Athletics relies heavily on debt borrowings which could put the company into financial trouble eventually since cost of borrowing eats up their profitability. Table. 4. Capital Market Ratios Country Industry Price/Earning Ratios 26.3 28.2 Market to Book ratio – Stock Price/Book Value per share 34.78 37.5 Dividend Yield 3.84% 2.50% Dividend Payout ratio 101.2% 2% 1. The P/E ratio (price-to-earnings ratio) is significant when it is compared with the industry. It will show whether investors are paying high or low for the shares of stock compared to the industry. Our benchmark index shows higher PE showing that Abel is not overvalued proposal. A P/e is a measure to know the valuation of the price paid for a share as related to the annual income of the company per share. (Investopedia ) 2. Market to book Ratio. The market value of Abel as compared with the industry is lower, and some reasons should be looked into here. This is defined as “the market value of a firm divided by capital invested.” (Cranfield) 3. Dividend yield. Investors will be happy to find out that their share in Abel is giving them a dividend yield more than the industry index on its first year of operation, and a high pay out ratio. In the analysis, the percentage of earnings paid to investors in dividends amounts to 101.% Conclusion. Although The figure on Table 4 showing 101.% dividend yield is a happy compromise with stockholders, figures should be reviewed, as comparison between industry and Abel show a big gap. Some explanations should be given for this. This figure will most likely be anticipated by stockholders in their future transactions. On the other hand, this looks promising, as it will encourage stockholders to increase the stockholders share in the company which would reduce the debt servicing responsibility of Abel. The overall performance of Abel Athletics in terms of financial statement presented looks good at the moment. But prior analysis indicated heavy debt leverage which may cause problems in instability in the future. As it is only one year, trend of sales cannot be forecast, but there seems to b a problem with keeping of inventory which ties up its capital and profit margin. On the whole, the financial statement presented gave an insight of the company’s operation and has proven to be an important instrument of analysis. End. References Answers.com Profit margin. Retrieved 19 March 2009 from Read More