Instructions Revised On 11/25/2022 Project 1 Step 4

Instructionsrevised On 11 25 2022project 1 Step 4 Instructions For T

View the balance sheet and income statement for the client company, Largo Global Inc. (LGI), using this Excel workbook, which includes the following tabs: 1. Bal. Sheet & Inc. Statement 2. Ratio Analysis 3. Common-size Analysis 4. Cash Flow Analysis. Use this information to complete the calculations in tabs 2–4, performing your calculations using the formula bar in the Excel workbook. Calculate ratios for each year, complete a common-size analysis, and a cash flow analysis based on the provided financial statements and industry benchmarks.

Paper For Above instruction

Largo Global Inc. (LGI) is a prominent player in the manufacturing sector, and analyzing its financial health through various ratios, common-size analysis, and cash flow statements provides insights into its operational efficiency, leverage, profitability, and liquidity over the years 2018–2020. This paper aims to synthesize the data and calculations associated with LGI’s financial statements and compare them with industry benchmarks to evaluate its overall financial stability and performance trajectory.

Introduction

Financial analysis is essential for understanding a firm's operational effectiveness and financial stability. It involves examining financial statements through ratios, common-size statements, and cash flow analysis to identify strengths, weaknesses, and areas of improvement. The case of LGI, with its multi-year financial data, offers an opportunity to explore these analytical tools in depth while benchmarking against industry averages.

Income Statement and Balance Sheet Overview

LGI's balance sheet and income statement from 2018 to 2020 reveal a dynamic picture of growth, asset management, and leverage. The company’s total assets increased from $3.33 billion in 2018 to $4.12 billion in 2020, indicating expansion. Notably, property, plant, and equipment increased significantly, reflecting capital investment. Conversely, current assets and liabilities also saw substantial growth, with current assets rising from $680 million to $955 million and current liabilities from $482 million to $515 million, signifying increased operational scale and short-term obligations.

Profitability metrics such as net income increased from $98 million in 2018 to $270 million in 2020. This trend underscores improvements in operational efficiency and profitability margins, which can be further analyzed through ratios.

Ratio Analysis

The ratio analysis provides a comprehensive measure of LGI's liquidity, efficiency, leverage, and profitability. The company's current ratio improved from approximately 1.49 in 2018 to 1.85 in 2020, surpassing the industry benchmark of 1.92, indicating an enhanced short-term liquidity position. Similarly, the quick ratio increased, suggesting improved ability to meet short-term obligations without relying on inventory sales.

Efficiency ratios such as inventory turnover and days’ sales in inventory reveal how effectively LGI manages its inventory. A consistent inventory turnover around 5.37 times indicates efficient inventory management, with inventory days decreasing slightly over the period, signifying faster inventory turnover. Accounts receivable turnover increased gradually, reducing the days’ sales outstanding from 21 days towards industry standards, enhancing cash collection efficiency.

Leverage ratios such as the debt to equity ratio and total debt ratio suggest a moderate increase in leverage, with LGI's debt to equity rising from 0.27 to approximately 0.45 in 2020, still below the industry benchmark of 0.27, indicating manageable leverage levels. The interest coverage ratio (times interest earned) remained strong at 5.5, illustrating healthy capacity to cover interest expenses.

Profitability metrics are robust, with net profit margins increasing from 14% to 17%, consistent with industry margins, indicating efficient cost control and price management strategies. Return on assets (ROA) and return on equity (ROE) also improved, highlighting better utilization of assets and shareholder equity.

Common-Size Analysis

The common-size analysis reveals each year's financial statements expressed as percentages of total assets or sales, allowing comparative analysis over time and with industry. Key observations include a steady increase in property, plant, and equipment as a percentage of total assets, indicating continued capital investments. The proportion of current assets relative to total assets remained stable, while current liabilities' percentage also increased slightly, aligning with increased operational scale.

Gross profit margins remained stable around 48%, and operating margins hovered near 24%, reflecting consistent operational efficiency. Expenses like selling, general, and administrative costs increased proportionally with sales, indicating controlled growth in operational expenses relative to income.

Cash Flow Analysis

The cash flow statement shows that LGI maintained positive cash flows from operating activities, essential for sustaining operations and funding growth. The net cash provided by operating activities increased over the period, driven mainly by increased net income and depreciation. Investing activities mainly involved capital expenditures on property, plant, and equipment, consistent with growth strategies, with net cash used in investing activities increasing.

Financing activities included increasing long-term debt and notes payable, supporting expansion and capital investment. Dividend payments remain proportionate to earnings, supporting shareholder value. The net increase in cash and marketable securities aligns with the overall growth trend.

Conclusion

The comprehensive analysis of LGI reveals a company experiencing steady growth, effective asset and inventory management, moderate leverage, and consistent profitability. Its liquidity position has strengthened, and cash flows from operations have supported ongoing investments without compromising financial stability. Benchmark comparisons with industry data suggest LGI is performing well against its peers, with room for improvement in leveraging and efficiency metrics. Continued focus on managing leverage and optimizing operational efficiencies will be critical for sustaining growth and increasing shareholder value in future periods.

References

• Anthony, R. N., & Govindarajan, V. (2014). Management Control Systems. McGraw-Hill Education.