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 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
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
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
Efficiency Ratios measure an efficient method that a company has employed in improving its receivables. In the case of Snead Company, the paper uses the days of collection period ratio to measure the company efficient ratio. The accounts receivable turnover measures how effective the company has been able to collect its debts and extend its credits. The formula to measure working capital ratio is revealed as follows:
Receivable Turnover = Sales/Accounts Receivable
Snead's Receivable Turnover = 580,000/5,000
Snead's Receivable Turnover =$116.
The Snead's receivable turnover shows that every dollar that the company invests in receivables, the company earns $116 in sales.
The collection period days measure how fast the Snead has been able to increase its cash supply. The higher the collection period, the greater the chance of the company to acquire debt losses. Formula to calculate the company collection period ratio:
Collection Period Ratio = Accounts Receivable + Sales…
Financial Analysis There are some interesting dynamics with this case. First, Snead would not purchase this company for one penny more than the net present value of future cash flows. Second, the business cannot possibly be a sole proprietorship -- with the chemicals and the risk of damage this has to be incorporated. That means that the company can borrow, and can borrow against its assets and future cash flows. I'm