Liquidity Analysis
The liquidity data for the firm is shown below:
The current ratio is a test to see if the most liquid assets of the company are able to cover for its short term liabilities if they should all fall due together. Its formula is current assets divided by current liabilities. Thus the current ratio is an indication of whether or not the firm is able to meet its short-term obligations (Stickney, Schipper, Weill and Francis 2012). From the data above, one can see that in the past five years, the company has indeed been able to cover for its current or short-term obligations. What is rather problematic at this point in time is the fact that the current ratio fell by half between the fourth and the fifth year. This is reflected in the huge increase in the current liabilities within the same period of time, which jumped by 106%. There was a tenfold increase in short term loans from 48.8 to 476.1 million, which is quite alarming.
The liquid ratio, on the other hand, reveals something about how inventory is managed in the firm. It is more stringent since the inventory part of the current assets section is taken out of the formula (Stickney, Schipper, Weill and Francis 2012). While it is certain that the current liabilities of the firm will not fall due all at the same, the liquid ratios of the firm indicate that there may be difficulties on the part of the firm. For instance, as of year 5, the firm has only $ 0.49 to pay per dollar of current liabilities. There may be a problem for the company when all the current liabilities become due at the same time.
Profitability Analysis
The profitability portion of the financial statements of the company is shown below:
Again there is that terrible decrease in profit from 98.6 million to a loss of 122.4 million once more between the fourth and the fifth years. This is attributed to the almost tripling of the administration expenses during this time. Historically, for the past four years, the company has posted profits before tax, but in the last year it was unable to do so because of the huge administrative expenses, which ate up the profits. Should the administrative expenses continue for a few more years, then the company may have difficulty sustaining its viability. Also, this may be the reason why a substantial amount of short term loans was made during the year – because the funds on hand could not cope with the necessary expenses and disbursements for the year.
Financial Structure
Over the last five years, there have been increases in the ratios for the financial structure. This would mean that the loans of the company have increased considerably. For instance, according to the data presented by the company, the total loans/net assets at book values over five years increased steadily from 37.7 to 59.1. This could be related to the fact that the short term loans of the company increased dramatically. Funds for use in the company seems to be coming from loans instead of the firm being able to obtain funds from operations or from investing. This could present a problem for the company in the near future if it is unable to obtain funds from its investments and operations.
Viability of the Firm in the Next Year
At the moment, the company appears to be in dire straits. One could surmise that it engaged in substantial amounts of short-term loans, and that the reserves of the company are also in decline. The total loans of the firm have quadrupled in the last five years, thus making one wonder about loans being the primary source of funds in the organization. The company is resorting to making loans in order to fund operations for the succeeding periods of time. This is not good because the company will then have to contend with an increasing amount of principal and interest to pay, which will also be a drain on the coffers of the firm. Another issue that must be investigated is the huge increase in administrative expenses. If the increase in administrative expenses cannot bring about a corresponding increase in sales, then this must be closely investigated indeed.
Thus it would be difficult to say with finality whether or not the company will survive the next few years, as this difficult turn of events seems to have peaked only between the fourth and the fifth years as indicated. However, the issues of administrative expenses, short term loans and overall loss in profitability must be addressed immediately. Also related to the administrative expenses is the staff costs which have reached over 20% of the firm’s turnover, with total staff costs quadrupling over five years, but with the corresponding number of employees increasing by only about a little over double over the same period of time. The inability to address these issues will make the company fall deeper and deeper into debt. As its administrative expenses keep on increasing indefinitely, it will continue to make loans in order to fund its operations. The firm will not be able to expand because its funds will be utilized for principal and loan payments, and to cope with the increases in the administrative expenses. These unusual expenses therefore have compromised the viability of the organization in at least the next year.
Reference
Stickney, C, Schipper, K, Weill, R and Francis, J 2012, Financial Accounting: An Introduction to Concepts, Uses and Methods, Cengage Learning, Mason, OH.
