Good Financial Analysis: Nu Skin Enterprises Report Example

Answer 1)

For Ratios and Common-Size Statements, please refer to excel sheet
Answer 2)
No, after referring to the notes to the financial statements, we do not find any areas that would cause concern in following US GAAP.

Answer 3)

The financial information obtained through the common-size analysis and ratio calculations assist the management in their decision making process in the following ways:
-It provides complete information over the change in the financial items over the period. Hence, management can frame their decisions accordingly.
-Management can also compare the ratio multiples and outcome of common-size analysis with that of rival firms and industrial average to ascertain their performance in comparison to them.

Answer 4)

In this section, using the tool of ratio analysis, we will unearth the financial performance of the company, and how the same has changed over the period of three years:
a) Liquidity Ratios
These ratios provide us information about the ability of the company to honor their short-term obligations as and when they become due. Below discussed are the two liquidity ratios for Nu Skin:
-Current Ratio: Current Assets/ Current Liabilities
-Acid Ratio: Cash+ Receivables/ Current Liabilities

Liquidity Analysis

Referring to the above table, we can witness that over the period of three years, the liquidity of the company has been declining consistently. Beginning with the current ratio, during 2011, the company has a current ratio of 2.20 which now stands at 1.44 only, courtesy higher proportion increase in the current liabilities base while current assets are growing at a smaller pace. We even tested the liquidity of the company through the stringent measure of acid ratio, and found the similar trend here as the ratio multiple declined from 1.34 in 2011 to 0.80 in 2013.
Thus, we can assert that over the period of three years, the liquidity roots of the company has gone weak, and the management must put a considerable thought over their working capital position.
b) Profitability Ratios
These ratios set carries great significance for all the stake holders of the company as it indicates the level of profit margin being earned by the company. Below discussed are the profitability ratios for Nu Skin:
- Net Profit Margin: Net Profit/ Revenue
-Return on Assets: Net Income/ Total Assets
-Return on Equity: Net Income/ Total Equity

Profitability Analysis

After witnessing a weak and disappointing liquidity position, we were happy to see the growing profitability of the company. Beginning with the net margin, over the period of three years, the profit margins of the company has increased consistently from 8.77% in 2011 to 11.49% in 2013, courtesy a blockbuster growth in the revenue figures that went on to grow almost double during these three years. Similar trend was witnessed in the ROA multiple that went on to increase from 15.44% in 2011 to 20.04% in 2013, indicating that the management has been generating good returns from its asset base.
Even the shareholders of the company will be ecstatic to see the growth in the ROE multiple courtesy sustainable growth in the net income of the company. Important to note, the ROE multiple of the company surged from 26.66% in 2011 to 42.49% in 2013, indicating that the company is generating high returns on the amount invested by equity holders.
c) Solvency Ratios
These ratios provide information about the capital structure of the company, and the level of financial risk embedded within it. Below discussed is the trend in the solvency ratios of the company:
-Debt Ratio: Total Debt (Short term+ Long term)/ Total Assets
-Interest Coverage Ratio: Operating Income/ Interest Expense

Solvency Analysis

Referring to the above table, we can see that during 2013, the debt ratio of the company declined significantly to 9.99%, indicating that as compared to previous years, the company financed few asset base with debt borrowings. The solvency position of the company is further solidified with the trend in its interest coverage ratio that went on from 46.8 in 2011 to 184.66 in 2013.

Thus, the trend of decreasing debt base and increasing interest coverage ratio validates the strong solvency position of the company.

d) Efficiency Ratios
Also known as Activity Ratios, these ratios provide information about the efficiency of the management over the use of the asset base of the company for generating revenue.
*We have used ending year balances and not average balances for calculating efficiency ratios
-Receivable Turnover Ratio: Revenue/ Trade Receivables
-Inventory Turnover Ratio: COGS/ Revenue
-Total Asset Turnover: Revenue/ Total Assets

Efficiency Analysis

After witnessing appreciable profitability and solvency trends, efficiency ratios of the company indicated depressing trends. Both inventory turnover and receivable turnover of the company declined consistently indicating that now it takes more time for the company to sell their inventory and collect bills from the debtors, respectively. Hence, capital is tied up in inventory levels and bills receivable for a longer period of time.
Similarly, the asset turnover of the company has declined from 1.76 in 2011 to 1.74 in 2013, indicating that the company has not been able to generate increased revenue figures using its asset base.

Answer 5)

Referring to the above discussion over the trend in the financial performance of the company over the period of three years, we can assert that while the capital structure of the company is more balanced with lower debt position and increased interest coverage position, the profit margins and revenue figures of the company are surging at an appreciable pace. However, the source of concern is the declining liquidity and poor efficiency over the company’s asset such as inventory and receivables.

Answer 6)

Considering the declining trend in the inventory turnover and asset turnover, it is necessary that Nu Skin Enterprise train its employee and adopt innovative marketing methods to improve the days of inventory turnover. In addition, the company also needs to consider further investment technologically efficiency of its asset base so as to improve its asset turnover, and generate more revenue per unit of its total assets.

Answer 7)

Being a publically listed company, the entity must consider the following accounting ethical issues:
Fraudulent Financial Reporting
Misappropriation of Assets
Full Disclosure of relevant accounting information

Works Cited

(2012). Annual Report 2012. Nu Skin Enterprises.
(2013). Annual Report 2013. Nu Skin Enterprises Inc.
Freedman, J. (n.d.). What Is an "Ethical Issue" in Financial Accounting? Retrieved March 21, 2015, from http://smallbusiness.chron.com/ethical-issue-financial-accounting-57889.html