Financial Analysis: Lincoln Electric Company
In this paper, we will analyze the financial performance of the company by putting the past two years financial under the microscope of ratio analysis. Below is the summary of all the ratios that we calculated for the company, followed by an extensive discussion as how the company performed over the year:
Analysis
We initiated the ratio analysis through liquidity analysis of the company and found that over the year, the liquidity position of the company has witnessed a marginal setback with both current ratio and acid ratio experiencing a declining trend. Beginning with the current ratio, the multiple plummeted from 2.47 to 2.23 with fall in the current assets figure; whereas current liabilities continued to increase. Furthermore, on calculating the acid ratio, we found the similar trend as the ratio multiple decreased from 1.45 to 1.21 because of decrease in cash reserves and receivables amount. Overall, the liquidity of the company has faced a marginal setback, but we will still rate the liquidity position as sustainable as the current assets is still significantly higher than the current liabilities.
Moving on to the profitability position of the company, referring to the figures above, during 2014, the profitability of the company went on to downstream ride as net margins fell from 10.30% to 9.06%. Similarly was the trend in the operating profit margin of the company that plummeted from 14.26% to 13.29% during the year. The shareholders of the company will be agitated to see the trend in the ROE multiple as although the multiple increased from 19.25% to 19.87%, however, this increase cannot be termed as sustainable as it was source from decrease in the shareholder equity, which itself is a negative signal for the company. Overall, the year 2014 could not provide a profitable run to the company; rather a 16% decline in the shareholder equity is a big source of worry for the company.
Next, we calculated the solvency ratios of the company, which provide information about the composition of the capital structure of the company, and how much financial risk is embedded in it. Referring to the above calculations, we witnessed that during 2014, Lincoln Electronic significantly increased the debt proportion in its capital structure that surged from 1.25% to 5.45%. However, this financial strategy is not justified considering the interest coverage ratio of the company that soared down miserably from 135.66 to 37.4, indicating that the company has deteriorated its capacity to honor interest payments, amid fall in the operating income, while the interest expense continued to rise.
We concluded the ratio analysis with the discussion of efficiency ratios. Also known as, Asset Management Ratios, these multiple provides indication over the efficiency of the management to use the asset base of the company. Referring to the above calculations we found that while Lincoln Electric lagged behind liquidity and profitability sections, it witnessed significant improvement over management of inventory and receivables. As for inventory, the period declined from 79 days to 64 days, indicating that it now take less time for the company to sell their products, and hence capital is freed up from the inventory levels much early now. Similar was the trend in the receivables period, where the time period collection of outstanding bills reduced from 47 days to 41 days, indicating that the customers are now paying their bills early, thus providing liquidity assistance to the company also.
At the end of this paper, we can assert that Lincoln Electric indeed had a tough financial run during 2014 where it lost on its profitability, and even the trend in the gearing ratios were not appreciable. However, for a company that has a strong working capital position and that has displayed impressive efficiency relating to management of inventory and receivables, we are sure that soon it will be back on sustainable financial performance on an overall basis.
Works Cited
Balance Sheet: Lincoln Electric Company. n.d. 10 April 2015 <http://financials.morningstar.com/balance-sheet/bs.html?t=LECO®ion=usa&culture=en-US>.
Income Statement- Lincoln Electric Company. n.d. 10 April 2015 <http://financials.morningstar.com/income-statement/is.html?t=LECO®ion=usa&culture=en-US>.
Most Important Financial Ratios. n.d. 10 April 2015 <http://www.readyratios.com/reference/analysis/most_important_financial_ratios.html>.
