Financial ratio analysis of Snead's Dry-Cleaning Company

Financial Analysis of Snead's Dry-Cleaning

Ratios measure the strategy of highlighting the relationships of items in a company's financial statements. In essence, ratio analysis assists in monitoring and reviewing the strengths or weakness of a company using a range of financial perspectives. In other words, ratio analysis assists in evaluating organizational financial and operating performances, which include solvency, efficiency, profitability, and liquidity. The trends of a company's ratios can be used to evaluate whether its financial systems are improving or deteriorating. (Williams, Susan, Mark et al. 2008). In essence, ratio analysis serves as a cornerstone to fundamental analysis. External stakeholders such as stockbrokers, consultants, shareholders, and governments can use the ratio analysis to determine the strength or weakness of a company. (Nissim, 2001).

Objective of this project is carry out the ratio analysis of the "Snead's Dry-Cleaning Company." The paper uses the key ratios to determine the strengths or weakness of the Snead Dry-cleaning using its balance sheets and income statements.

Financial Analysis of Snead's Dry Cleaning

The section carries out the ratio analysis of the Snead's Dry Cleaning to assist in implementing the company strategic plan.

Current Ratio

Current ratio measures the solvency of the Snead's Dry Cleaning, which reveals the capacity of the Snead to pay up its debts. In other words, current assets measure the Snead's ability to use its current assets to pay up its liabilities. Higher the current assets the better for the company. A current asset of 2.0 or higher is better, and formula to calculate the current ratio is as follows:

Snead's Current Ratio: Current Assets/Current Liabilities

Snead's Current Ratio: 15,000/30,000

Snead's Current Ratio= 0.5

Quick Ratio

The quick ratio is the same as the acid test ratio that shows the level of the liquidity of a company. The quick ratio measures the ability of a company to cover its liabilities with readily convertible cash. A quick ratio of 1.0 or more is good.

Formula to calculate the quick ratio is as follows:

Snead's Quick Ratio: (Cash + Accounts Receivable) / Current Liabilities

Snead's Quick Ratio: (10,000 + 5,000) / 30,000

Snead's Quick Ratio: 15,000/30,000

Snead's Quick Ratio= 0.5

Debt Ratio

The debt ratio measures the ability of a company to meet the firm's creditors. In other words, a debt ratio reveals the total available fund that a company is supposed to give its creditors. Formula to calculate the debt ratio is as follows:

Snead's Debt Ratio: Total Debt / Total Assets

Snead's Debt Ratio: 285,000 / 285,000

Snead's Debt Ratio = 0

Return on Assets Ratio

Return on assets measure the ability of a company to efficiently turn its assets into dollars. The formula to calculate return on asset is as follows:

Return on Assets= Net Income / Total Assets

Snead's ROA= 78,500 / 285,000

Snead's ROA= 0.275

Working Capital Ratio

The working capital ratio measures the extent a company is able to use its current assets to cover its current liabilities. If the working capital is below 1.0, the company does not have enough working capital to cover its current liabilities indicating liquidity problems. However, if a company working capital ratio is 2.0 and above, the company has enough working capital to cover its liabilities. The formula to measure working capital ratio is as follows:

Working Capital: Current assets/Current liabilities.

Snead's Working Capital Ratio: 15,000/30,000

Snead's Working Capital = 0.5

Strategic Plan for the Snead's Dry-Cleaning

The outcome of the Snead's Dry Cleaning ratio analysis reveals that Snead lacks resources to accomplish all the tasks despite that it can boast of regular customers of between 400 and 600 with net income of $78,500. Analysis of the company financial ratios reveals that it will be difficult for Snead to purchase all the new equipment for the renovation. The total investment for the new infrastructures will be between $125,000 and $175,000, and Snead does not have enough cash to purchase all these equipment. Moreover, the company does not have enough current assets to cover its short-term liabilities. The company current ratio is 0.5 revealing that the company is having challenges to cover up its short-term debts. At the end of the 2013 fiscal year, Snead's current liabilities are greater than its current assets. In other words, Snead is not capable of meeting up some of its obligations. The Snead's current ratio also shows that Snead can run into a liquidity problem if the management attempts to buy new equipment with the available cash because Snead does not have enough working capital to carry out a new investment. (Tracy, 2012). The company working capital ratio is 0.5, and a working capital ratio should be greater than one before a company can boast of having a good working capital. (Peterson, 1999). Despite Snead's low working capital ratio, the company has not incurred any significant debt because its debt ratio is 0.0. In essence, Snead has a potential to expand its business despite its low working capital since the company has not incurred a debt.

The paper recommends that Snead can use external suppliers who specialize in the other dry cleaning services to obtain these services at the lowest costs. It is essential to realize that Snead is currently facing competition with one modern dry cleaning company a few blocks to the Snead's business location. Moreover, this new company charges the rates of between 5% and 20% lower than the rate of the Snead's Dry Cleaning. Thus, Snead should take advantages of the benefits to be derived from the contracting opportunities in order to achieve competitive market advantages. In essence, Snead can implement the recommendations of Sheldon's uncle using the subcontracting contractors. Snead can use the subcontractors to carry out the following services:

(1) Drop off and pickup service

(2) Repair and tailoring

(3) Collaboration with luggage repair

(4) 8-hour of turnaround service

Snead can derive several benefits from using the external contractors to expand its business and these include:

Able to satisfy customers using a single solution

Able to increase competitive market advantages

Able to integrate different skills

Increasing market share

Increasing visibility

Able to focus on its core capabilities

Able to obtain complementary capabilities

Sharing rewards and risks

The outcome of these contracting opportunities will assist Snead to qualify for the bank loans, which will assist the company to invest in additional business opportunities thereby increasing its market opportunities and total assets.

Conclusion

The report carries out the ratio analysis of Snead's Dry-Cleaning to recommend the strategic planning for the company. The findings of the ratio analysis reveals that Snead's Dry-Cleaning need to improve its current assets as early as possible because the company does not have enough current assets to cover its current liabilities. The results of ratio analysis show that the company does not have inventory to convert into cash making the company to be susceptible to a liquidity problem. Snead is currently having a liquidity problem because it is unable to have access to the bank loans. Moreover, the company working capital is low. The report recommends that Snead should use the subcontracting opportunities to implement its non-core services. Using the external contractors, Snead will be able to achieve competitive market advantages thereby increasing its total assets and qualify for the bank loans.

Reference

Nissim, D.(2001). Ratio Analysis and Equity Valuation: From Research to Practice. Review of Accounting Studies. 6. 109 -- 154.

Williams, J.R. Susan, F.H. Mark S.B. et al. (2008). Financial & Managerial Accounting. McGraw-Hill Irwin

Peterson, P. (1999). Analysis of Financial Statements. New York: Wiley.

Tracy, A. (2012). Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyze Any Business on the Planet. Chicago. Bidi Capital Pty Ltd.