Smith & Wesson is an American firearms manufacturing company. It has been in operation since 1952 and most of the innovations in ammunitions are attributed to it. The company is well established and its shares are traded in the New York stock exchange. Its financial health has been consistently good for many years as evidenced by the financial analysis-ratio and cash flow analysis- below for the year 2012. The financial data used is derived from its annual published financial statements (NASDAQ 1).
Financial ratios
Financial Ratio Year Formula Computation Ratio
Net profit margin 2012 Net Profit/Total Sales 26.43÷412 =0.1:1
2011 -82.77÷392.3 = -0.2:1
2010 32.51 ÷ 406.1 = 0.1:1
Operating expense 2012 Operating Expense/Total Revenues 165.16÷412 =0.4:1
2011 210.79÷392.3 =0.5:1
2010 178.26÷406.1 =0.4:1
Debt to Equity 2012 Long-term+ shot-term debt/Total Equity 53.74÷112.83 =0.5:1
2011 110÷ 95.08 =1.2:1
2010 53.74÷112.83 =0.5:1
Current Ratio 2012 Current assets + Current liabilities 190.71÷83.35 =2.2:1
2011 203.56÷122.29=1.7:1
2010 190.71÷83.35 =2.2:1
Discussion
The net profit margin ratio shows that Smith and Wesson make a profit of $0.1 for every unit of sales despite of having made a loss in the previous year. This recovery is encouraging and id likely to raise the value of the stock. The operating expense ratio is also improving from the last two years. However this improvement in profitability and operations seems to have resulted from the high debt the company has engaged in as evidenced by the debt to equity ratio which has drastically reduced from the previous year. Apparently the amount secured from debt has been used to balance the current ratio. This means that the ability of the company to meet its operational obligation is temporally. This means that eventually the stock price Smith and Wesson will fall. To the investors this is the best time to sell the shares in the company since the price has now improved and is expected to fall soon.
Cash flow analysis
The operating cash flow to net sales is a ratio used to show how much cash is received for every dollar of sales. From the smith & Wesson cash flow statement for the year 2012 the ratio is as follows (NASDAQ 2).
Formula Year Computation Ratio
Operating cash flow/ Net Sales 2012 37.37÷333.47 0.11
2011 38.36÷259.47 0.15
2010 28.03÷282.72 0.10
The declining operating cash flow to net sales ratio is precursor that the company performance is at stake (Shim and Siegel 47). This is additional evidence that there is a very high possibility that the company may experience financial constraints if the trend persists. The profits are likely to drop and consequently the share prices will go down. It is therefore the best time sell the company stock held to prevent greater losses in case the corporation runs bankrupt.
Below is a graph showing the trend of historical stock prices.
Bibliography
NASDAQ: SWHC. Finance: Smith & Wesson Holding Corp. Smith & Wesson Holding CorpAccessed on 19th Nov, 2013 https://www.google.com/finance?fstype=ii&q=NASDAQ:SWHC
Shim, Jae K, and Joel G. Siegel. Handbook of Financial Analysis, Forecasting, and Modeling. Chicago, IL: Wolters Kluwer/CCH, 2007. Print.
