Purpose: Essay Examples

This memo provides a detailed ratio analysis of the financial statements of the company for years 11 and 12. It compares the company’s ratios for year 12 with that of year 11 as well with industry average ratios. For this purpose, we will use the quartile industry figures as benchmarks.

Liquidity ratios

i) Current ratio
Current ratio shows the amount of current assets for every dollar of current liabilities in the company. It assesses the ability to pay short-term obligations using its current assets. It is given by dividing current assets by current liabilities. In year 12, the company had a current ratio of 1.77 indicating that it had sufficient current assets to meet its current liabilities. The ratio declined from 1.86 in year 11 showing a decrease in the liquidity of Company G. The current ratio was below the first quartile figure of 3.1 and the second quartile value of 2.1. However, it was more than the third industry quartile ratio of 1.4. The figure indicates that the company had a weaker liquidity than its peers in the industry.
ii) Acid test ratio
It measures the capability of the company to pay its short-term liabilities using its quick assets (current assets excluding inventories and prepayments). In year 12, Company G’s acid test ratio was 0.43 implying that its quick assets were not adequate to meet its short-term debts. The ratio declined from 0.64 in year 11 showing that the liquidity of the company declined. The ratio was less than the industry average for the first, second and third quartiles. This indicates that Company G’s liquidity is weaker than peers in the company.

Working capital management/Efficiency ratios

i) Inventory turnover
The company’s inventory turnover for year 12 was 5.2 implying that it replenished its stock 5.2 times. This is a reduction from the 6.1 in year 11 suggesting a decrease in the efficiency of the company to convert inventory into sales. This figure was less than industry data of 13, 10.2 and 8.3 for the first, second and third quartiles respectively. Therefore, the company has a weaker efficiency of converting the stock into revenue than its competitors.
ii) Day sales in receivables
The ratio indicates the number of days a company takes to collect its receivables. The ratio was 11.9 in year 12 up from 11.1 in year 11. This increase shows a fall in the firm’s efficiency to collect receivables. The ratio was less than the industry average of 15.1 and 13.5 for the first and second quartiles respectively, but more than the 11.3 for the third quartile. This implies that the company is stronger than its peers in the efficiency of collecting debts.

Solvency Analysis:

The debt ratio was 29.76% in year 12 down from 28.43% the previous year. This indicates the 29.76% of the total assets were acquired through borrowing. The ratio was less than the industry averages for the three quartiles implying that the company had a stronger solvency than its peers. Times interest ratio was 36.51 in the year 12 down from 31.12 in year 11. The figure was more than industry values for all the quartiles suggesting that the company’s solvency was stronger than that of its peers.

Profitability Analysis:

In year 2012, the company had a net profit margin of 6.43% up from 5.43% in 2011. This is higher than the industry figures of 6.12% and 4.2% for the second and third quartiles. Return on total assets of 14.52% was higher than industry averages for the last two quartiles. In addition, the company’s return on equity of 19.61% was more than industry values for the three quartiles. The figures indicate that the company was more profitable than its competitors in the industry

Market ratios

i) Earnings per Share:
The ratio measures net income for every share held in the company. EPS was 1.1 in 2012 up from 0.672 in 201 indicating an improvement in returns to shareholders. This was more than industry figures for the three quartiles hence the company had a better return to its shareholders than its peers.
ii) Book Value per ordinary share:
It indicates the dollar value available to ordinary shareholders if the company’s assets are liquidated. The ratio for Company G was $5.87 in 2012, an increase from 4.25 in 2011. This was more than industry values for the second and third quartiles indicating that it had a stronger book value per common share.
iii) PE ratio:
PE ratio for 2012 was 5.25 implying that investors were ready to pay $5.25 in share prices for every dollar of the company’s shares. This was less than industry values for all the three quartiles indicating that the company’s shares were undervalued in relation to the shares of other firms in the industry. It indicates that the company had a weaker P/E ratio as it was less than industry averages for all the three quartiles.