Ratio Analysis Description And Liquidity Review

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Ratio analysis is a vital financial tool used by investors, management, and analysts to evaluate a company's performance, financial health, and operational efficiency. It involves calculating various ratios from financial statements to interpret different aspects such as liquidity, profitability, and solvency. The ratios for Adamas Pharmaceuticals (ADMS) and Impax Laboratories (IPXL) for fiscal years 2012 and 2013 are examined, providing insights into their financial stability and operational success during these periods.

Paper For Above instruction

Introduction

Financial ratio analysis offers a comprehensive view of a company's operational efficiency and financial health. This paper evaluates the liquidity, profitability, and solvency ratios of Adamas Pharmaceuticals (ADMS) across two fiscal years, 2012 and 2013. Additionally, comparative insights with its competitor, Impax Laboratories (IPXL), are discussed to contextualize ADMS's financial position within its industry. Through this analysis, we aim to understand the company's liquidity management, profitability trends, and ability to meet long-term obligations.

Liquidity Ratios

Liquidity ratios measure a company’s capacity to meet short-term obligations using its short-term assets. The current ratio, a key liquidity indicator, evaluates this by dividing current assets by current liabilities. A current ratio above 1 generally indicates satisfactory liquidity, suggesting that the company has more current assets than current liabilities.

For ADMS, the current ratio improved significantly from 1.67 in FY 2012 to 20.39 in FY 2013. This dramatic increase stems from a decline in current liabilities from USD 38 million to approximately USD 4 million, combined with relatively stable current assets. In a comparative context, its competitor's current ratio was lower at 4.29 in FY 2013, indicating that ADMS was better positioned to cover its short-term liabilities.

This swelling of the current ratio could raise concerns about potential excess liquidity, yet it mainly reflects efficient debt management and reduced short-term debt obligations by ADMS. The rapid decrease in liabilities indicates effective cash flow management and strategic liability reduction, contributing to enhanced liquidity (Investopedia, Liquidity Ratio, n.d).

Profitability Ratios

Profitability ratios assess a company's ability to generate earnings from its operations and assets. The operating profit margin reflects the profit earned from core business activities before taxes and interest. For ADMS, this margin increased from 53.24% in FY 2012 to over 80% in FY 2013, a result of a near doubling of revenues from USD 37 million to USD 71 million, alongside a reduction in operating expenses from USD 18 million to USD 14 million. This suggests improved operational efficiency and cost control.

In comparison, its competitor exhibited lower profitability measures during the same period. The net profit margin, which indicates the overall profitability after all expenses, interest, and taxes, rose from 47.33% to 71.62% for ADMS, again outperforming the competitor's net profit margins of 14.32% and 28.73%. This significant increase in net profit margins demonstrates efficient cost management and revenue growth, positively impacting shareholder value (Investopedia, Operating Profit, n.d.).

Solvency Ratios

Solvency ratios evaluate a company's ability to meet its long-term financial commitments. The interest coverage ratio, which compares earnings before interest and taxes (EBIT) to interest expenses, indicates the firm's capacity to service its debt. ADMS showed considerable improvement from 48.97 in FY 2012 to 593.18 in FY 2013, primarily due to a decrease in long-term liabilities from USD 21 million to less than USD 1 million. Such a dramatic increase in the interest coverage ratio signals a robust solvency position, reducing the risk of insolvency.

Similarly, its industry competitor also demonstrated a strong solvency position with an interest coverage ratio increasing from 132.82 to 351.69 in the same period. Elevated interest coverage ratios imply that both companies had ample earnings to cover their interest obligations, reflecting prudent debt management and financial stability (Investopedia, Interest Coverage, n.d.).

Comparative Implications and Industry Context

The ratio trends highlight ADMS's improved financial health, notably its enhanced liquidity, profitability, and solvency positions in FY 2013. The decline in liabilities and increase in assets suggest strategic financial management and operational efficiency gains. While Adamas exhibited superior liquidity and profitability ratios compared to its industry peer, caution must be exercised to prevent excess liquidity from indicating potential under-utilization of assets.

Further, the strong interest coverage ratios of both companies depict their ability to withstand financial shocks and service debts comfortably. These ratios also correlate with the low levels of long-term liabilities relative to earnings, indicating prudent leverage management.

Conclusion

Analysis of ADMS's financial ratios over FY 2012 and 2013 reveals a company that significantly strengthened its financial position. The marked increase in liquidity ratios coupled with improvements in profitability underscores effective operational strategies and cost management. The enhancement of solvency metrics suggests a robust capacity to meet long-term obligations. Comparing ADMS with its competitor shows a competitive advantage in liquidity and profitability, emphasizing its improved operational efficiency. Overall, ADMS demonstrates strong financial health, promising for future growth and stability.

References

  • Investopedia. (n.d.). Liquidity Ratios. https://www.investopedia.com/terms/l/liquidityratio.asp
  • Investopedia. (n.d.). Current Ratio. https://www.investopedia.com/terms/c/currentratio.asp
  • Investopedia. (n.d.). Operating Profit Margin. https://www.investopedia.com/terms/o/operatingmargin.asp
  • Investopedia. (n.d.). Net Profit Margin. https://www.investopedia.com/terms/n/netmargin.asp
  • Investopedia. (n.d.). Interest Coverage Ratio. https://www.investopedia.com/terms/i/interestcoverage.asp
  • Yahoo! Finance. (2015). ADMS Competitors | Adamas Pharmaceuticals, Inc. Stock. https://finance.yahoo.com
  • Morningstar. (2015). Financials and Ratios for Impax Laboratories Inc. https://www.morningstar.com
  • Elvis Picardo. (2003). Solvency Ratio Definition. Investopedia. https://www.investopedia.com/terms/s/solvencyratio.asp
  • Financials.morningstar.com. (2015). Balance Sheet for Adamas Pharmaceuticals Inc. https://financials.morningstar.com
  • Financials.morningstar.com. (2015). Financial Ratios for Impax Laboratories Inc. https://financials.morningstar.com

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