Analyzing G. Company's financial condition using financial ratios

¶ … Financial Condition of a Firm Using Financial Ratios and Other Financial Data

The financial condition of the G. Company

A look at the comparative income statements and comparative balance sheets of the company reveals that the year 2012 has manifested a series of changes relative to 2011. At the level of the sales for instance, 2012 revealed significantly higher sales, supporting the premise of the reviving home center sector. Still, at the level of the company's cash and cash equivalents, massive decreases have been registered.

In other words, the conclusion of whether the last year has been a financially sound one for the company is difficult to be made through a simple revision. In this light of events, several ratios were computed and assessed. The lines below indicate the valuations of the ratios and their setting in the context of the company and the industry.

Current ratio

The company current ratio represents a weakness since the company is less able to pay its short-term debts when compared to both its ability in 2011, as well as the average ability of the companies in the industry.

2. Acid-test ratio

The acid-test ratio is also a weakness as the company possesses a restricted ability to use its short-term assets to cover its immediate liabilities, without selling items from its inventory (Investopedia, 2012). This weakness is obvious regarding both the company in 2011, as well as the other firms in the industry.

3. Inventory turnover

The inventory turnover is a relative weakness since it is significantly lower than the industry averages, yet it reveals an increase since its value in 2011, meaning that the company has become better able to more quickly sell and replace its inventory.

5. Day's sales in receivables

Similar to the receivable turnover, the day's sales in receivables also register high values compared to both the previous year as well as the industry. Still, this is clearly indicative of the company's inability to quickly and efficiently sell its products and collect the money owed by customers.

6. Debt ratio

The organization's debt ratio has increased slightly compared to the previous year, but still remains significantly below the industry average. This virtually means that the company is strong as it uses less debt to support its operations, compared to other companies in the industry.

7. Times-interest-earned ratio

The times interest earned ratio is significantly higher than the industry average, meaning that the firm is better able to pay its debt. This adds to the internal organizational strengths.

8. Rate of return on net sales

The rate of return on sales is comparable to the industry averages and is even higher than the same ratio through 2011. This means that the company should not face any major concerns regarding this financial indicator.

9. Rate of return on net assets

The rate of return on assets is also of no major concern for the company, since it is comparable with both 2011, as well as the industry averages.

10. Rate of return on common stockholders' equity

The return on equity is lower than the same indicator in 2011, but higher than the industry average, meaning that it still represents an organizational strength.

11. Earnings per share of common stock

The earnings per share of common stock are equal to the industry averages and they are higher than the values in 2011. This means that the indicator should not raise any concerns for the economic agent.

12. Price earning ratio

The PE ratio is higher than its value in 2011, but still lower than the industry average, meaning that it represents an organizational weakness.

13. Book value per share of common stock

The book value per share of common stock is higher than it was during the previous year, but it is still lower than the industry average. This means that it represents an organizational weakness as the stability of the share after all debts are paid is limited (Investopedia, 2012).

Based on the computation of the ratios above, it becomes obvious that the future strategic efforts of the company should focus on consolidating its short-term ability to repay debt, as well as the performances of its stock.

References:

Shim, J.K., Siegel, J.G., 2008, Financial management, 3rd edition, Barron's Educational Series, ISBN 0764139401

Investopedia, http://www.investopedia.com last accessed on January 17, 2012