- Liquidity Ratios
Before the author of this paper analyze the ratios above, it is prudent to note that generally, liquidity ratios are always used to determine the ability of the firm or the business organization to meet its short- term debt obligations.
Current ratio
Current ratio= current assets/ current liabilities. The current ratio measures the company’s current assets against the current liabilities. Therefore, the higher the ratio the better. This is because higher number implies that the company has large amount of the current assets which can be used to meet the current liabilities. Therefore, we can say that in the financial year 2012, the business organization was in a better position to meet its current liabilities compared to 2010 because of the higher ratio.
Quick ratio
It is also known as the acid test ratio.
Quick ratio = (cash and equivalents + short- term investments + accounts receivable)/ current liabilities. Just like the current ratios, the acid test ratio also shows the ability of the firms to meet their short term business organizations. The higher the ratio, the better the position the business is in order to meet its short term obligations. Therefore, we can deduce that in 2009, the business organization stands a better position to meet its short term obligations quickly compared to 2010 and 2011 because of the higher ratio recorded in 2009.
- Activity Ratios
These ratios measure the efficiency with which the business organization uses its assets such as the inventories, the accounts receivables and the fixed assets.
Inventory turnover; measures the number of times a company’s investment in inventory is turned over in a given year. Therefore, the higher the turnover the better because the company with high turnover requires a smaller investment in inventory compared to the one that produces the same level of sales with a low turnover. Therefore, we can conclude that in 2009, the business organization recorded a low turnover and picked up from 2010 to 2012.
Inventory turnover= cost of goods sold/ inventory.
Accounts receivable turnover; it is the ratio of the net credit sales of the business compared to its average accounts receivable during a given period normally a year. This ratio measures the efficiency of the business when it comes to collecting its credit sales. Therefore high value of the ratio may indicate efficiency in collecting the outstanding sales while low value may indicate inefficiency in collecting the outstanding sales. Therefore, from the above table, we can deduce that the business organization was efficient in collecting its outstanding sales in 2010 2012 and 2011 respectively compared to 2009. This is evidenced by low turnover in 2009.
Total assets turnover; provides an indication of the efficiency with which the assets are being utilized. Low ratio implies that excess assets are used to generate sales hence the need to liquidate some of the fixed or current assets. From the diagram above we can say that in 2009 the organization used large amount of assets to generate sales compared to 2011 and 2012.
- Leverage Ratios
Debt ratio= total debts/total assets. It measures the ability of the business organization to meet its debt. The higher the ratio, the greater the financial risk. Therefore, from the table above, we can deduce that the financial risk of 2009 was high compared to that of 2010 to 2012.
Total debt to equity ratio; this ratio analyzes the relative proportion of all the debts claims to the ownership claims against the total assets. = total debt/ shareholders equity. Therefore, the higher the ratio, the higher the business financial risks.
- Profitability Ratios
Measures the ability of the business organization to generate earnings, cash flows and profits which are relative to the amount of money that such a business have invested.
Profit margin on sales; analyzes how well the company can control the cost of its inventory and also the manufacturing of its products. The larger the profit margin, the better the company. Therefore, from the above table, we can deduce that the company was worse off in 2009 because it recorded a negative profit margin. However, it became better off from 2010 to 2012 since it recorded a positive higher profit margin compared to 2009.
Net operating income on sales; used by the companies to determine their profit margins on the products and the services rendered by the company or any other business organization. The higher the operating income as a percentage of the net sales the higher the profit margin of the business. From the table above, we can deduce that the net operating income on sales ratio was negative indicating that the business organization recorded a loss. On the other hand, the net operating income on sales ratio improved significantly from 2010 to 2012 indicating that the business began to make profit.
Return on investment; is always used to determine or evaluate the efficiency of investment. The higher the ROI the better the investment. Therefore, from the above table, we can say that undertaking investment in 2009 was not good because of negative ROI ratio. However, it improved from 2010 to 2012.
- Market ratios
Source: www.reuters.com
These ratios relate to the observable market value.
Price earnings ratio; this ratio indicates how much the investors are willing and ready to pay per dollar of the current earnings. Therefore, higher P/E ratios are associated with the growth of stock. This ratio can also indicate how expensive a particular stock is.
P/E ratio = price per share/ earnings per share. From the above table we can say that the industry was willing to invest by paying expensively per dollar compared to the individuals who invested in companies. Therefore, the growth of stock in industry was high compared to that of the company.
Dividend yield. Represents the ratio of the dividends per share to the current share price. It measures the percentage an investor is earning in the form of dividends.
Dividend yield= dividend per share/ current share price. Therefore, from the above table, the individual who invests in company will earn a higher return compared to the one investing in the industry because of the higher dividend yield. On the other hand, the dividend yield five year growth rate indicates that the yield of the dividend yield of the industry grew much higher compared to that of the company during the five year period.
