Part #1
The return on sales (Net Profit Margin) is a ratio that measures the average dollar of revenue earned by a company. In most cases, the return on sales is used to provide profitability comparison between different companies. In the company provided, the return on sales has been rising and falling. The changes in return on sale are caused by different levels of sales and revenues realized by the company (Tracy 34).
The return on equity is a financial ratio that measures the business profitability in relation to the profits generated from the money invested by the shareholders. Therefore, it is the ratio between the net income and the shareholders equity (Bragg 92). From the case study provided, the return on equity has been on the steady rise, with 2012 being the highest. Therefore, we can deduce that the company has an increasing efficiency in generating profits from each unit of shareholders equity. The recommended return on equity should range between 15-20% and we can deduce that this company has efficient utilization of shareholders money to generate the profits and grow the company with their current 16.2 ROE. The 7.04 ROE in 2011 to 16.2 ROE in 2015 signifies a positive trend.
Average collection period is a financial instrument that measures the duration the business takes to receive the payment owed by other institutions. The lower average collection period is recommended since the company is seen as turning its receivables into cash within a very short span of time. From the case study provided, the average collection period has been constantly reducing from 84.86 in 2011 to 50.29 in 2015. This shows a positive trend in the manner in which the company receives their wealth owed by other entities.
Inventory turnover is important financial analysis tool that can be used to determine the inventory planning (Tracy 83). The issues that affect inventory that necessitate inventory planning include obsolescence, flow method, purchase practices, and seasonal build. High inventory rate implies that there is tight management of purchasing function while low inventory implies that the business may be suffering from flawed purchasing system. In this case study, there is an increasing inventory and this implies that the company is greatly moving toward reducing the holding costs. Such an increasing inventory is beneficial in that the company would be spending less on utilities, insurance, and theft in maintaining their stock. As long as the revenues remain constant, this company is poised to increase their net income and profitability from their reducing holding cost.
Current ratio is an important financial analysis instrument that shows the ability of the business to pay off its short-term liabilities with their current assets (Tracy 55). Therefore, it is the ratio of the current assets to the current liabilities used to understand the liquidity of the firm. In the case study provided, the current ratio for the past five years has been stable at around 2.5 to mean that the company is better poised to cover their short-term obligations. With the current ratio of 2.5, the company has exercised an additional protection against unforeseeable contingencies that may affect the short-term operation of the business. The events that may cause the changes from year to year are related with the management of working capital.
Quick ratio is the financial instrument that is used to determine how a firm has sufficient assets that can be converted into cash to pay its bills by comparing the total amount of cash, market securities, and account receivables to the amount of current liabilities. For the past five years, the quick ratio of this company ranges from 1.06 to 1.6. With such a quick ratio, the company is better poised to pay back its current liabilities. The changes in the current ratio are caused by the changes in current assets and inventory in relation to the current liabilities.
The interest time earned is an important financial instrument used to determine the ability of the company to meet the interest payments on its debt (Bragg 71). Usually, a higher interest ratio earned points at the ability of the company to meet its interest payment. From the case study provided, the company is on the negative trend as its ability to meet its interest payments declines and its vulnerability to interest rate fluctuations is high. The changes in the interest time earned can be affected by the changes in the interest rates and the company income.
The debt to equity ratio determines the risk involved in the financial structure of the company by revealing the ratio of the company’s debt to equity. This company has an increasing debt to equity ratio and this may be caused by the company’s equity and their changing debt levels.
The fixed asset turnover ratio is used in businesses to compare the net sale in relation to the fixed assets (Tracy 51). This company has an increasing fixed asset to turnover ratio, which indicates that the business has less money tied up to their fixed assets in the sales revenue. These changes in the fixed asset to debt ratio may be caused by selling off excessive fixed asset capacity, outsourcing work, and doing effective work to generate sales with a relatively small amount of fixed assets.
Part #2
Average collection period in 2011 is 84.86
The inventory turnover in the same year is 3.36
Annual Credit sales =28249
Days held is 84 days
Therefore, the investment in account receivables is 6,591.43
Part #3
The assessment overall assessment on the performance of the performance of the management is good. The company has a stable return on sales and is efficient in generating profits from each unit of shareholders equity. Furthermore, the company has a bright future from the positive trend by which the company is turning its receivable within short time span. With efficient purchasing system, the company is having goods levels of inventory turnover. From the current ratios, it is evident that the case study company is better positioned to service their short-term obligations.
Work Cited
Bragg, Steven. Business Ratios and Formulas: A Comprehensive Guide. Wiley; 3 edition. 2012. Print
Tracy, Alex. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. CreateSpace Independent Publishing Platform; 2 edition. 2012. Print
