Fundamentals Of Accounting Ratio Year 1 Year 2 451541

Titlebus Fp3061 Fundamentals Of Accountingratioyear 1year 2current R

Analyze the financial ratios and data provided for Orange Company for the years ended December 31, 2013, and 2012. Calculate and interpret key financial ratios including current ratio, quick ratio, receivables turnover, inventory turnover, profit margin, asset turnover, return on assets, return on equity, earnings per share, price-earnings ratio, debt ratio, debt-to-equity ratio, and times interest earned. Using these ratios, evaluate the company's liquidity, profitability, efficiency, financial leverage, and overall financial health. Discuss any significant trends or changes between 2012 and 2013, and provide insights into the company's operational performance, risk profile, and financial strategies based on the ratios and financial data.

Paper For Above instruction

Financial ratio analysis is an essential aspect of evaluating a company's performance and financial health. It offers insights into various operational, liquidity, profitability, and leverage metrics. This paper applies such analysis to Orange Company based on data from the years 2012 and 2013, illustrating how ratios can signal financial strengths or vulnerabilities and inform managerial decision-making.

Liquidity Ratios:

The current ratio, a measure of short-term liquidity, increased from 1.36 in 2012 to 1.48 in 2013, indicating improved ability to meet short-term obligations. The quick ratio, which excludes inventories from current assets to assess more liquid assets, experienced a slight increase from 0.94 to 1.02. These improvements suggest better liquidity positioning in 2013, possibly due to increased cash or receivables relative to current liabilities.

Efficiency Ratios:

Receivables turnover rose from 9.7 times in 2012 to 10.2 times in 2013, indicating the company collected its receivables more quickly, reducing the cash conversion cycle. Inventory turnover decreased marginally from 2.4 to 2.3 times, suggesting a slight accumulation of inventory or less efficient inventory management. The asset turnover ratio remained stable at approximately 1.21-1.22, reflecting consistent utilization of assets to generate sales.

Profitability Ratios:

Profit margin improved from 11.4% in 2012 to 12.6% in 2013, indicating higher profitability per dollar of sales. Return on assets increased significantly from 13.7% to 15.4%, highlighting enhanced asset utilization efficiency. Similarly, the return on equity improved from 28.5% to 29.3%, reflecting better earnings relative to shareholder investment, likely aided by retained earnings growth and efficient management.

Market Ratios:

Earnings per share (EPS) can be derived from net income and shares outstanding but is not explicitly provided. However, with net income rising from $31,400 in 2012 to $38,400 in 2013, EPS likely increased, supporting the improved profit margins and higher return ratios. The price-earnings ratio increased from 10.4 to 12.4, indicating higher investor confidence or expectations for future growth in 2013.

Leverage Ratios:

The debt ratio declined from 50.2% to 45.3%, showing a reduction in leverage and reliance on debt, which decreases financial risk. The debt-to-equity ratio similarly decreased, highlighting a more conservative capital structure. The times interest earned ratio increased from 9.6 to 13.0 times, signifying stronger earnings coverage of interest expenses and improved debt servicing capacity.

Financial Position and Performance Insights:

The increase in liquidity ratios signifies better short-term financial health, likely supported by higher cash balances and receivables from increased sales. Profitability improvements suggest operational efficiencies or pricing strategies that enhanced margins. Slight inventory management issues may warrant attention, but overall efficiency remained stable.

The reduction in leverage indicates a strategic move toward lower financial risk, potentially in response to market conditions or to strengthen balance sheet robustness. The higher times interest earned ratio reinforces this conservative approach, reducing vulnerability to interest rate fluctuations or earnings volatility.

Conclusion:

Orange Company demonstrated notable improvements in liquidity, profitability, and financial stability from 2012 to 2013. The increased current and quick ratios, coupled with higher profitability margins and return ratios, reflect effective management and operational efficiency. Decreased leverage and improved interest coverage suggest a cautious approach toward debt management, reducing financial risk. Continuous monitoring of inventory management and further debt optimization could enhance financial performance in subsequent years. Overall, the ratios present an encouraging picture of a company strengthening its financial position and operational effectiveness.

References

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