The firm’s 2003 financial rations
Analyse the firm’s current financial position from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluation of the firm’s liquidity, activity, debt and profitability and market. Answer: Analysis of the company’s financial statement is sectionalised into liquidity, activity, debt and profitability and market and the details are as follows: Liquidity: The current and quick ratios have improved over the years and are higher than the industry average.
In comparison between the current ratio and quick ratio it indicates that almost 50% of the company’s current assets value in 2003 is made up of inventory. Nevertheless, the quick ratio for 2003 suggest that the company has no short term liquidity problems and should have no difficulty in paying its debts as they become due. Activity: The inventory turnover pace is constant for the last 3 years (2001 to 2003) but much slower against the industry average. The slower turnover suggests that the company may be holding large inventory.
There are some dangers that the inventory could contain certain obsolete items that may require writing off. As for the average collection period, there was no improvement instead it has increased further from 50 days in 2001 to 57 days in 2003
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This could have been one of the reasons as to why the collection period has been on the increasing trend. The total asset turnover ratio has been within the range of 1. 5 and 1. 6. In comparison to industry average, it is much lower. The lower ratio suggests that the assets are under utilised in generating sales. The other reason could be the fixed assets acquired on 2003 (approximately $402,000 in cost) have not fully contributed to the business. Debt: With respect to leverage, the company’s debt ratio has deteriorated further and is twice the industry average.
This suggests that the company is relying heavily on borrowing to finance its business operations. This has also resulted in higher interest obligation, which has caused then times interest earned ration decline further from 2. 2 in 2001 to 1. 6 in 2003. There is a need to control the borrowings otherwise the company may face financial difficulties in meeting its financial obligations. Profitability: There is no significant change in the gross profit margin for the last 3 years (2001 to 2003 however the net profit margin has declined in the same period.
The decline could due to high interest payment. In addition to the net profit, the return on assets and return on equity has also dropped and significantly lower in comparison to the industry average. Market: The poor performance of the company has caused the common stock market price to drop. In fact the stock market price $11. 38 is quoted at a discount of $1. 56 in 2003 ($12. 94 – $11. 38) against book value per share of $12. 94.