Marginal Analysis CEO

Re: Financial Analysis

I have completed my financial analysis of Company G. It is my general impression than Company G. is in good financial health. Thirteen financial ratios were calculated and this analysis shows that the company is generally a mid-range performer. With respect to the liquidity of Company G, that is questionable. The current ratio is within industry norms, but declined in the past year. The acid-test ratio is a weakness, and it has declined in the past year significantly. In the long run, we enjoy a favorable debt ratio. It has increased slightly but still outperforms industry norms. As we have a relatively low level of debt, our interest coverage remains very healthy, and has increased in the past year.

Inventory turnover remains a concern. It was below industry norms last year, and this year has declined further. Sitting on this much old inventory invites taking a writedown, which will affect the earnings per share that our customers value. Further, our accounts receivable is below par. The accounts receivable turnover has moved from a point of no concern to being a weakness in the past year. The days' sales in receivables remains of no concern and has increased slightly in the past year.

In general, our returns are in line with our industry peers. The return on shareholder's equity is a strength, and this increased slightly...

The returns on assets and on sales are in line with industry norms, both towards the upper end of normal, and both have increased in the past year. The shareholders will no doubt be happy with the increase in EPS that we posted this past year, though disappointed with the fact that the EPS is below that of our industry peers. The P/E ratio is starting to creep up a bit as well and we now have a P/E ratio that is high for the industry. The book value per share of common stock is of no concern, and has increased over last year.
Yet, the horizontal analysis shows us that the growth story is not at all far-fetched. We increased net sales by 11% last year, and gross profit by 14.6%. This highlights the hard work that we have done to build the company. Our operating expenses grew at a slower rate than sales, allowing us to post a growth rate in operating income of 26.4%. EBIT also increased, by 27.4% and net earnings grew 36%. There is little doubt that growth like that cannot go unnoticed by the market for long -- we increased sales significantly, and without corresponding increase in our costs.

The balance sheet shows an increase in assets that roughly corresponds with the increase in sales, but the liabilities grew faster than the assets. The biggest concern is the increase in accounts and notes payable, which rose by 25%. This was largely in the accounts payable category,…