The understanding of the financial ration helps the organization to evaluate the effectiveness and efficiency of the company. In order to analyze the financial position of the company, the financial ratios are categorized into five distinct categories. These categories include liquidity, leverage, profitability, valuation and efficiency. These ratios are significant to the managers within the organization, the firm’s creditors and the shareholders who use them to evaluate the financial condition of the firm. Below is the financial ration analysis of Lexmark Company categorized into five types.
Liquidity ratio
In this category the liquidity ratios includes current ratios, quick ratio and cash ration. The current ratio of Lexmark company shows a positive trend, that is, the ratio has been increasing from 2007 and 2011 (1.380 to 1.966). As the years pass by, the ratio increases. This ratio is therefore favorable to the short-term creditor since high ratio reduces the risks. This shows that the company is able to remain solvent during the downtowns. However, the ratio is not favorable to the shareholders who prefer lower ratio that illustrates that the firm’s assets are working for the growth of the business.
Similar to the current ratio, the quick ratio or the acid test ratio of the Lexmark company has been consistently increasing as the years pass by. Between 2007 and 2009, the ratio increased tremendously but almost stagnated between year 2009 and 2010, before it rejuvenated to 1.668 in the year 2011. This illustrates that the risk of the company are reduced. This is because the inventories, which are difficult to liquidate, are dropped in the calculation of the ratio. On the other hand, the increase of the cash ration from 0.185 to 0.706 in the last four years shows that Lexmark Company is able to pay-off its current liability when the prompt payment were demanded.
Profitability ratios
The most commonly used ratios in this category include return on equity, return n assets (ROA), gross margin and profit margin. Generally, these ratios for Lexmark Company show unpredictable trends, that is, the ratios have been increasing in some years and degreasing in some instances. The profit margin ratio is relatively higher in 2011 than in 2007 indicating that the firm has experienced lower cost of goods sold in 2011. The inconsistency of the ROA ratio shows that the firm has ineffectively utilized its assets to generate sustainable profit.
On the other side, the inconsistency in ROE shows that the firm has not efficiently invested to earn sustainable profit. Between 2008 and 2009, the firm the earning from the investment decreased greatly. Generally, the profitability ratios of Lexmark Company indicate that the efficiency in the firm to earn profit is unpredictable.
Advantage ratios
The ratios that are used to analyze the financial condition of the Lexmark Company, in this category, involve total debt ratio, dept equity ratio and equity multiplier and time interest ratio. Noticeably, the total debt ratio has been almost inelastic over the past five years. This indicated that the company has effectively balanced its debts and assets over the past five years. Debt equity ratio increased tremendously from 0 to 0.800 for one year and then started going down from 2008 to 2011. This show that the company has been more relying on the shareholder equity than the firm’s total liability. The equity multiplier shoot up in 2008 then started to fall to level at around 2.6. on the other hand the times interest earned ratio fall in 2008 to negative 50 and then starting to raise to 14.8. This illustrates that the earning of the firm has been able to pay the interest charged on the debt. The firm has an average of high leverage ratios that shows that the firm has been able to sustain high debt.
Asset utilization or turn over ratios
This category involves inventory turnover, day’s sales in inventory receivable turnover and day’s sales receivable. The inventory turnover and days sales in receivable trend seem to reduce between 2007 and 2007 then rises in the rest years. However, their ratios are high indicating that the firm is utilizing its assets efficiently. However, day’s sales in inventory and receivable turnover increased in 2007 to 2008 and then decrease onwards. This indicates that the form is operating efficiently hence, fewer days are taken to sale the inventory and to sell goods on credit. Generally the asset turnover ratios of the company shows that the firm efficiently utilizing its resources to operate efficiently.
Market value ratio
This category contains market book ratio and price earnings ratio. In the Lexmark Company, the price earnings ratio is at the peak in 2008 while the rest years levels between 2 to 3.8. This indicates that the company value in 2008 was higher than rest of the five years. On the other hand, the market book ratio of the firm is steadily dropping. The general trend of the market value ratios is approaching zero. This shows that the firm’s book value is dropping, that is, the total value for its outstanding share is decreasing. In other words, the low market value ratio of the company indicates that the company is trading at a discount.
Comparison
The quick ratio, debt ratio and market to book ratio are used to compare Lexmark Company with its competitors. The analyzed competitors include CISCO, Dell, HP, IBM and the whole industry. CISCO has the highest quick ratio indicating that it is the position one company to meet it short-term liability. The quick ratio of Lexmark is at average but slightly below the industry level. Although the company is better than Dell, HP and IBM, being below the industry level indicates it is doing good in the industry to meet it short term financial obligations.
The debt ratio of the Lexmark company was higher between 2008 and 2009 tha other competitors including IBM. Between 2007 and 2008, mid 2009 and 2011, the liquid ratio of the company was lower than the industry level. The less debt ratio indicates that the company is using less debt hence, it have the stronger balance sheet between these years. The company has minimized it debt activities in it operation better than its competitors.
The market to book ratio is relatively lower than its main competitors and the trend shows that it is continuing dropping. Since the ratio is above 1, this shows that the stock is undervalued. However, that of the Lexmark is below the others indicating that its stocks are more undervalued than the rest of its competitors. Generally, most of the financial ratios of the company seem to be more favorable than that of its competitors hence, it operates more efficiently.
Work cited
Richard Bull, Financial ratios: how to use financial ratios to maximize value and success for your business. Amsterdam; Boston: Elsevier/CIMA Pub., 2008.
