Calculate The Ratios And Interpret The Results 548914

Calculate The Ratios Interpret The Results A

Solve the problem below, calculate the ratios, interpret the results against the industry average, and fill in the table on the worksheet. Then, provide an analysis of how those results can be used by the business to improve its performance.

Turn in your completed work to the M1: Assignment 3 Dropbox by Wednesday, December 10, 2014.

Paper For Above instruction

Financial Ratio Analysis of Gary and Company

Gary and Company’s financial health can be assessed effectively using various financial ratios derived from their balance sheet and income statement data for the year 2010. These ratios are critical indicators that help evaluate the company’s profitability, asset efficiency, liquidity, and leverage. By comparing these ratios to industry averages, the company can identify its strengths and weaknesses and strategize accordingly for improvement.

1. Profit Margin on Sales

The profit margin on sales is calculated as Net Income divided by Net Sales. Using the provided data, the profit margin equals (27 / 795) * 100 = 3.4%. The industry average is 3%. Gary and Company’s profit margin slightly exceeds the industry average, indicating good profitability relative to peers. A 'Good' rating suggests efficient cost management and pricing strategies that should be maintained or improved upon for competitive advantage.

2. Return on Assets (ROA)

ROA is calculated as Net Income divided by Total Assets. For Gary and Company, it is (27 / 450) * 100 = 6%. The industry average is 9%, which is higher. The company's ROA is considered 'Low,' indicating less efficient utilization of assets to generate profit. To enhance ROA, the company should focus on better asset management and possibly increase income without proportionally increasing assets.

3. Receivable Turnover

Receivable turnover is Net Sales divided by Accounts Receivable. This equals 795 / 66 ≈ 12.05X. The industry average is 16X. The company’s receivable turnover is 'Fair,' suggesting some inefficiency in collecting receivables. Improving collection processes can increase turnover, freeing up cash flow and reducing credit risk.

4. Inventory Turnover

Inventory turnover equals Cost of Goods Sold divided by Inventory: 660 / 159 ≈ 4.16X. The industry average is 10X, indicating low inventory turnover. This suggests excess inventory or slow-moving stock, which ties up capital unnecessarily. Improving inventory management or sales strategies could help increase turnover to industry levels.

5. Fixed Asset Turnover

Fixed asset turnover is Net Sales divided by Net Fixed Assets: 795 / 147 ≈ 5.41X. The industry average is 2X. Gary and Company’s ratio is markedly higher and considered 'Good,' implying efficient use of fixed assets to generate sales. Maintaining operational efficiency here is vital.

6. Total Asset Turnover

This ratio is Net Sales divided by Total Assets: 795 / 450 ≈ 1.77X. The industry average is 3X. The company’s ratio is 'Low,' indicating underutilization of total assets in generating sales. Strategies might include optimizing assets or expanding sales initiatives.

7. Current Ratio

The current ratio is Current Assets divided by Current Liabilities: 303 / 111 ≈ 2.73X. The industry average is 2X. Gary and Company has a 'Good' liquidity position, providing sufficient short-term financial cushion. Maintaining or slightly optimizing liquidity levels can secure operations against unforeseen liabilities.

8. Quick Ratio

The quick ratio is (Current Assets - Inventory) divided by Current Liabilities: (303 - 159) / 111 ≈ 1.34X, close to the industry average of 1.5X. It is considered 'Fair,' indicating reasonable liquidity without overly tying up cash in inventory. Improving quick assets can further solidify liquidity.

9. Times Interest Earned

Times interest earned is EBIT divided by Interest Expense: 49.5 / 4.5 ≈ 11X. The industry average is 7X. The company exceeds the industry average, indicating strong capacity to cover interest payments and lower financial risk. Maintaining this measure supports debt management strategies.

2. Analysis

Analyzing the ratio results reveals several insights into Gary and Company’s financial performance and operational efficiency. The company demonstrates strong profitability in terms of fixed asset utilization and interest coverage but shows weaknesses in asset utilization efficiency and inventory management. The relatively low return on assets suggests that the company’s assets are not being used to their full potential in generating profits. Meanwhile, the low inventory turnover indicates inefficiencies in inventory management, which could lead to increased holding costs and reduced cash flow.

To improve overall performance, the company should consider strategies such as streamlining inventory processes, possibly adopting just-in-time management systems to reduce excess stock. Additionally, focusing on enhancing receivables collection can shorten cash conversion cycles, freeing up working capital. Since the fixed asset turnover is strong, investment in capacity expansion should be coupled with efforts to increase sales, which could raise the total asset turnover closer to industry levels.

The high current and quick ratios reflect a conservative liquidity stance. While liquidity is essential, excessively high ratios may imply underutilized assets. The balance between liquidity and operational efficiency should be fine-tuned to optimize cash flow and profitability.

In terms of leverage and interest coverage, Gary and Company’s ratios indicate a healthy financial position, providing leeway to take on strategic growth initiatives without risking solvency issues. Continuous monitoring and maintaining these ratios are crucial to sustain financial stability.

Overall, the company’s focus should be on asset optimization, inventory management, and receivables collection to enhance efficiency and profitability further, aligning more closely with industry benchmarks. These improvements can contribute positively to long-term growth, investor confidence, and competitive positioning.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
  • Gibson, C. H. (2017). Financial Reporting & Analysis (13th ed.). South-Western College Publishing.
  • Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.
  • Ross, S. A., Westerfield, R., & Jaffe, J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
  • White, G. I., Sondhi, A. C., & Fried, D. (2018). The Analysis and Use of Financial Statements. Wiley.
  • academictips.com. (2020). Financial Ratios and Their Uses. Retrieved from https://academictips.com
  • Investopedia. (2023). Financial Ratios. https://www.investopedia.com
  • SEC.GOV. (2018). Financial Ratios in Regulatory Filings. U.S. Securities and Exchange Commission.
  • Financial Times. (2023). Industry Average Financial Ratios. https://ft.com
  • Standard & Poor’s. (2022). Industry Ratios for Comparative Analysis. S&P Global Ratings.

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