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Pulp, Paper and Paperboard, Inc. ratio analysis - Essay Example

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The activity ratios are however on a decreasing trend. Though the inventory turnover ratio improved in the year 2010, it fell in 2011…
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Pulp, Paper and Paperboard, Inc. ratio analysis
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Pulp, Paper and Paperboard, Inc. Ratio analysis Financial ratios for the year ended December Liquidity ratios Current ratio = current assets/ current liabilities
= 575000/345000
=1.667
Quick ratio
= (current assets – inventory)/ current liabilities
=332000/345000
=0.962
Activity ratios
Inventory turnover
= cost of goods sold /inventory
=1701000/ 243000
= 7 times
Average collection period
= (debtors/ net credit sales)* 365
=(237000/ 2080976)*365
=41.57 days (assuming that all sales are made on credit)
Total assets turn over
= sales/ total assets
= 2080976/1000000
= 2.081
Debt ratios
Debt ratio
= total debt/ total assets
= 533000/ 1000000
= 0.533
Times interest earned
= income before interest and tax/ interest expense
=106130/19296
=5.5
Profitability ratios
Gross profit margin
= (gross income/sales)*100
= (379976/2080976)*100
= 18.25 %
Operating profit margin
= (operating profit/ sales)*100
(106130/2080976)*100
= 5.1%
Net profit margin = (Net income/sales)*100
= (52024/2080976)*100
= 2.45%
Return on total assets
= (net income/average total assets)*100
= (52024/1000000)*100
5.2024%
Return on equity
= (net income/average shareholders’ equity)*100
= (52024/467000)*100
=11.14 %
The following table therefore summarizes the company’s ratios from the year 2009 to the year 2011 and the industry’s ratios for the year 2011
Ratio 2009 2010 2011 2011
__________________________________________________________________
Current Ratio 1.6 1.7 1.667 1.6
Quick Ratio 0.9 1.0 0.962 0.9
Inventory Turnover 8.1 9.3 7.0 8.4
Average Collection Period 33 days 37 days 41.57 days 39 days
Total Asset Turnover 2.3 2.2 2.081 2.2
Debt Ratio 60% 56% 53.3% 58%
Times Interest Earned 2.5 3.5 5.5 2.3
Gross Profit Margin 21% 19.7% 18.25 % 20.4%
Operating Profit Margin 4.7% 4.8% 5.1% 4.7%
Net Profit Margin 1.8% 1.6% 2.45% 1.4%
Return on total assets 4.1% 3.5% 5.202% 3.08%
Return on Equity 10.3% 7.9% 11.14% 7.3%
Time series analysis
The company’s liquidity ratios have an averagely increasing trend, an indication of improving ability to meet ‘short-term’ obligation. The activity ratios are however on a decreasing trend. Though the inventory turnover ratio improved in the year 2010, it fell in 2011. Average collection period and asset turnover performance constantly worsened with the years. The debt ratios uniformly improved across the years.
While the gross profit margin decreased with time, operating profit margin and net profit margin improved with time. Return on total assets and return on equity also had an averagely increasing trend with a slight decline in the year 2009. The company’s ration therefore, on the average, indicates an improving trend in its financial position.
Cross sectional analysis
The company’s ratios for the year 2011, apart from activity ratios and gross profit margin, are above the industry’s average. This means that the company’s financial position is averagely above that of the industry.
Limitation of ratio analysis
One of the challenges of financial ratios is the difference between the net book values of balance sheet values of items and the market value. This discredits computed ratios. Diversity of organizations into different industries also makes it difficult for cross sectional analysis. Changes in economic trends such as seasonality and inflation also challenges application of ratio analysis due to changing values in commodities (Brigham and Houston, p. 120, 121).
Cautions that must be taken when reviewing cross sectional and time series ratio analysis
Proper care should be taken when calculating ratios. This is because negligence may result in misleading information (Moyer, McGuigan, Rao and Kretlow, p. 93, 94).
Works cited
Brigham, Eugine, and Houston, Joel. Fundamentals of Financial Management. Mason, OH: Cengage Learning, 2012. Print
Moyer, Moyer, McGuigan, James, Rao, Ramesh, and Kretlow, William. Contemporary Financial Management. 12th Ed. New York, NY: Cengage Learning, 2012. Print Read More
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