Current Ratio=current Assets/Current Liabilities Case Study Example

International Trade Finance

Section 1: Introduction
This report is designed with the sole purpose of strengthening Seward Inc financial position, through providing an in-depth analysis of the firm’s financial performance. The content of the report consist of the various financial ratios such as the profitability and leverage ratios, and how this ratios compares to the overall industrial ratios as provided by the financial analyst.

Section 2: Firm performance

Profitability measures are the most important thing to business managers. One of the most used tools for determining the business bottom line and its return to investors is by the use of profitability ratios. The operating profit margin indicates that the business makes $0.11(before interest and taxes) for every dollar of sales. This is a good performance considering the overall industry performance is at $0.08 for every dollar of sales. The operating return on assets at the same time indicates that the business is performing well in terms of converting its investment into profit. The business is very efficient in utilizing its assets and liabilities internally. This aspect is determined by a fixed asset turnover of 3.5 as compared to the industry ratio of 3.1.The current ratio of 3 and acid test ratio of 1.5 indicates the business has a high ability to pay off its current liabilities with its current assets while at the same time meeting its short-term obligations. With a debt ratio of 33%, the business has a good leverage as it is able to fulfill its financial obligations effectively.

Section 3: Compartive analysis

The liquidity of Seward is lower than the overall industry average that has a current ratio of 3 and an acid ratio of 1.5. The current ratio of 2.5 and the acid ratio of 1.3 though indicate that Seward Inc is still in a sound financial position and can pay their short-term obligations. Meaning the firm can settle off its current liabilities with the use of current assets very effectively.

Section 3b

The managers of Seward Inc are generating a considerable attractive profit on the firm’s assets. In the overall industry, the operating profit is 0.08 meaning the company makes $0.08 for every dollar of sales made. This ratio is lower when compared to the Seward Inc operating profit that indicates a ratio of 0.11 or 11%, meaning Seward Inc makes $0.11 for every dollar of sales made.

Section 3c

Seward Inc as firm uses the balance sheet assets such as inventory and accounts receivable to borrow money or acquire a loan. The firm then provides a security interest in its assets to the lending party though the amount of days it takes to collect on its receivables is higher than the average number of days taken by the industry.

Section 3d

In determining whether the managers are generating a good return on equity, one needs to consider the actual amount of the net income that has been returned to the firm as a percentage of the shareholders equity. The return on equity ratio of 15% indicates that the managers of Seward Inc generate $0.15 of profit for every $1 of shareholder's equity. This ratio is higher compared to the industry ratio of 11%.

Section 4: Financial ratios

The current ratio enables analyst and investors to examine the liquidity of a company and whether it can pay short-term liabilities with its short-term assets.

According to Seward current asset=$2000 while current liabilities=$800, for this reason
Current ratio=2000/800=2.5
Acid-test ratio=Cash available + Accounts receivable+ STI/current L
= (500 +600)/800=1100/800=1.3
Days in receivables=Account receivables/(Annual Net sales/365)=600/(4500/365)=600/12.33=48.66
Days in inventories=Ending inventory/ (Cost of goods sales/365) =900/ (2800/365) =900/=117
Operating returns on assets=EBIT/Total Assets=500/3300=0.151=15.1%
Operating profit margin=operating income/net sales =500/4500=0.11
Total asset turnover =Net sales/total assets=4500/3300=1.36
Fixed asset turnover=sales/Net F .A=4500/1300=3.46
Debt ratio=total debt/total assets=1200/3300=0.36
Times interest earned=EBIT/Interest Expenses=500/60=8.3
Return on equity=Net income/Shareholders equity=315/2100=0.15