Financial ratio analysis of Computron's liquidity and efficiency

Ratio and Financial Analysis of Computron

Ratio analysis is the overall numerical values of an organization collected from income statements and balance sheets of a company to evaluate its financial performances. Investors, creditors, and potential shareholders used the ratios to evaluate the financial performances and financial health of a company. The management can also use the ratios to analyze the organizational performances. Profitability ratio, current ratios and efficiency ratios are the three groups of ratios used to evaluate organizational financial performances. Profitability ratios measure the ability of a company to turn its assets into profitability. The current ratios measure the ability of a company in using its current assets to meet its short-term obligations. Efficiency ratios reveals the ability of a company to utilize its inventory or assets efficiently.

b. This section calculates the company current ratio and quick ratios.

Current ratio =Current Asset/Current Liabilities

Current ratio = $2,680,112 / $1,039,800 = 2.6

Quick Ratios = (Current Asset -- Inventories) / Current Liabilities

Quick = $2,680,112 / ($1,039,800 -1,715,480 = 0.9

Table 1: Computron's Ratios

2014

2014

Current assets

2680112

Current Liabilities

1039800

Inventories

1716480

Account Receivables

878000

Current Ratios

2.577526

Quick Ratios

0.926747

Total Assets

3516952

Sales

7035600

Net Fixed Asset

836840

Inventory Turnover

4.098853

Days Sales Outstanding

45.54978

Fixed Asset Turnover

8.407342

Total Asset Turnover

2.000482

In 2012, the company current ratio was 2.3 and deceased to 1.5 in 2013. However, the company quick ratio was 0.8 in 2012 and decreased to 0.5 in 2013. The results revealed that company liquidity position was better in 2012 than its liquidity position in 2013. In the projected 2014, the company liquidity position was better than the 2012 and 2013 liquidity position based on its financial records in the table 1. The 2014 projection ratios reveal that the company financial position is good because it has enough liquidity to settle its current liabilities since its current ratio is more than 2.57. The quick ratio is fair because the quick ratio is very close to 1 revealing that the company can settle its current liabilities without its inventories.

Similar other ratios, the liquidity ratios also assist management to evaluate the liquidity position of the company in order to carry out an effective management planning if the company is facing a liquidity problem. Moreover, the liquidity ratio can assist investors and creditors to make an investment or credit decisions about the company.

c. Inventory turnover = Sales / Inventory

Inventory turnover = $7,035,600 / $1,716,480

Inventory Turnover =4.1

Days Outstanding Sales = (Account Receivables / (Annual Sales / 365 days)

Days Outstanding = $878,000 / ($7,035,600 / 360)

Days Outstanding = 44.9 Days

Fixed assets turnover = Sales / Net fixed assets

Fixed assets turnover = $7,035,600 / $836,840

Fixed assets turnover = 8.4

Total assets turnover = Sales / Total assets

Total assets turnover = $7,035,600 / $3,516,952

Total Assets= 2.0.

Computron's inventory ratio declines within the past three years, and is below the industry average. It shows that the company is unable to replenish the new stock and move older inventory from the stock. However, the company Days Outstanding Sales have increased steadily and are above the industry average revealing that the company is weak in its collection efforts. However, fixed asset turnover is above average, and the total asset turnover is below industry average revealing that the company has not effectively manage its assets.

D.

Debt ratio = Total debt / Total assets

Debt ratio = ($1,039,800.00 + $500,000.00) / $3,516,952.00

Debt Ratio= 43.8%

Times Interest Earned = EBIT / Interest expense

Times Interest Earned = $502,640 / $80,000

Times Interest Earned = 6.3

Liabilities to asset ratio = Total Liabilities / Total assets

Liabilities to asset ratio = ($1,039,800.00 + $500,000.00 / 3,516,952.00

Liabilities to asset ratio= 43.8%

EBITDA Coverage = "(EBITDA + Lease Payments") / ("Interest + Loan Repayments + Lease Payments")

EBITDA Coverage = ($502,640 + $120,000 + $40,000) / ($80,000 + $40,000)

EBITDA Coverage= 5.5

The forecasted EBITDA coverage ratios and debts for 2014 are below the industry average revealing that the company needs to improve its debt management in order to meet the industry standards. On the other hand, the company times-interest-earned and liabilities to asset ratio are above the industry average showing that the company should manage its debt effectively.

E.

Profit margin = Net income / sales

Profit margin = $253,584 / $7,035,600

Profit= 3.6%

Basic earning power = EBIT / Total assets

Basic earning power = $502,640 / $3,516,952

Basic Earning Power= 14.3%

ROA = Net income / Total assets

ROA = $253,584 / $3,516,952

ROA = 7.2%

ROE = Net income / Common equity

ROE = $253,584 / $1,977,152

2012 Du Pont Equation = 13.2%

Du Pont equations results for the years 2012, 2013, and 2014 reveal that the company will face challenges to utilize its assets to generate profitability in 2013, and reach its level of efficiency in 2014, which may increase the company financial leverage.

Computron's Strengths

Compton's strength is its ongoing effort to reduce its debts based on its ability to decrease its debts ratios. The company is also being aggressive to manage its expenses.

Computron's Weaknesses

Computron's ROA and ROE are lower than the industry average. Moreover, day sales outstanding is high and the company has recorded low assets turnover ratio.

The financial ratios can be subject to human errors. Moreover, ratios cannot be used to arrive at conclusion about a company financial strengths and weakness. The financial ratios can also lead to personal bias. (Williams, Susan, Mark, et al.2008).

J.

The qualitative factors to consider when evaluating company financial performances include:

Expertise of Management team

Economic environment that the company is operating

Political environment that the company is operating

Legal environment that the company is operating.

Availability of skilled workforce.

Competitive environment that the company is operating.

Reference

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