CanGo's financial condition can be measured by analyzing its financial statements, in particular by conducting a ratio analysis. The company is liquid. Its current ratio is very high at 5.39 and quick ratio likewise at 4.53. These figures are typical of a company that is in great financial condition. These figures are bloated, however, by the fact that much of the current assets are in the form of accounts receivable. CanGo's accounts receivable turnover is terrible. At just 1.52, the company is collecting on its receivables every 240 days, or 8 months. Having eight months worth of receivable overdue is absurd. Part of the discussion at CanGo right now is centered around finding cash for expansion projects -- there's about 7 months of it sitting in the A/R account. In general, the company has a lot of working capital, $164 million of it. If it wants to expand, there it might not need to tap capital markets at all.
Profitability at the company is strong. The company made $5.486 million on $50 million in sales, for a return on sales of 10.97%. This is a high level, and indicates that the company is generating healthy margins on its products. With strong cost control, profitability should be even higher in the future. The company's ROA is 2.33%, which is a fairly good number as well.
The efficiency ratios indicate that even with the profitability, the company is not operating at a high level of efficiency. The receivables turnover ratio has already been discussed, and the inventory turnover ratio is almost as bad. At 1.8 times, the inventory is only being turned over once every 202 days. This is far too high. CanGo can improve its operating performance by improving its efficiency. If it manages its production levels, it can reduce the finished goods inventory. If it does a better job with collections, it can convert more of its receivables into cash that it can use. (The same can be said of the company's sky-high finished...
The cash conversion cycle is just far too long at CanGo.
Especially when the conversation centers around financing, it is worth considering the capital structure of the firm. The financial leverage ratio is 0.67, indicating that the company has more equity than debt in its capital structure. Debt financing is usually cheaper than equity financing but it comes with risk. The company appears to be able to handle this risk -- it is profitable and all it will take is improvements in the cash conversion cycle in order to pay down its obligations. As CanGo does not have an unreasonable amount of debt, the company is in a good position to take on additional debt financing should it so desire.
Overall, CanGo has a strong financial position. In short, it is profitable, liquid and has an appropriate degree of leverage for a firm of its type. The company does have some issues with efficiency -- it carries too much inventory and its collections department is performing deplorably. Making efficiency improvements will deliver even better figures for the company's performance.
Expansion is, however, one of the major issues at hand. Presently, the company has several ideas for expansion that look promising, but is having difficulty meeting its current obligations. There is not much money with which to expand either. There are two cost-benefit approaches that can be used here. The first is to treat the company as a finite set of resources. This means that the cost-benefit analysis weighs each person's potential value in the company at multiple positions. The person would be put into the position that best maximizes shareholder value. For any one person, this seems like a simple task. For example the discussion was held about pulling Whitney off of servers and putting her on apps. The tradeoff was that the servers are more critical to the survival of the business but that putting other…
