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Financial Analysis

1561 words - 7 pages

|Sound Investment, Inc.|
Memo
To: Brian Little, President/CEO of Durable Home Goods
From: , President/CEO Sound Investment, Inc.
Date: 6/25/2011
Re: Durable Home Goods
Brian,
Attached you will find my analysis of Durable Home Goods (DHG) for fiscal year 11 and my insights on some of your strengths, weaknesses, and opportunities to drive topline sales in 2012.
Current Ratio
The current ratio is an indication of a company’s ability to pay current liabilities with current assets. The formula for calculating the current ratio is current assets divided by current liabilities. DHG has a current ratio of 1.69 for year 11. When compared to the current ratio of 1.83 in year 10 and ...view middle of the document...

10 for year 10 and the industry quartiles of 13, 10.2, and 8.3 is decreasing and indicates a weakness. Management needs to take action to reduce inventory levels, eliminate non profitable product lines to increase net income and profitability.

Accounts Receivable Turnover
The accounts receivable ratio is an indication of a company’s ability to collect from its customers. The formula for calculating this is net credit sales divided by average net accounts receivables. DHG has an accounts receivable turnover of 32.1 for year 11. This compared to the accounts receivable turnover of 32.2 for year 10 and the industry quartiles of 35.2, 33.5, and 31.4 is indicates there is no concern. No recommendations to management needed.
Day’s Sales in receivables
The day’s sales in receivables ratio is an indication of a company’s ability collect its outstanding receivables in a timely manner. The formula for calculating this is average net accounts receivables divided by one day’s sales. DHG has a day’s sales in receivables ratio of 6.8 for year 11. This compared to the day’s sales in receivables of 11.1 for year 10 and the industry quartiles of 15.1, 13.5, and 11.3 indicates a strength for DHG. Management has been able to significantly reduce the amount of time it takes to collect on its receivables and is substantially exceeding the top industry quartile performance.
Debt Ratio
The debt ratio is an indication of a company’s ability to pay long term debt. The formula for calculating this is total liabilities divided by total assets. DHG has a debt ratio of 30.74% for year 11. This compared to the debt ratio of 28.54% for year 10 and the industry quartiles of 30%, 45%, and 66% indicates strength. Management should investigate reducing any expenditure that would be financed by long term debt that does not add significant revenue or increase the company’s assets.
Times-interest-earned
The times-interest-earned ratio is an indication of a company’s ability to pay interest expense. The formula for calculating this is income from operations divided by interest expense. DHG has times-interest-earned ratio of 160.29 for year 11. This compared to the times-interest-earned ratio of 172.59 for year 10 and the industry quartiles of 29.7, 17.2, and 8.1 indicate a strength for DHG. No recommendation to management needed.
Rate of return on net sales
The rate of return on net sales ratio is an indication of a company’s ability to sell its goods profitably. The formula for calculating this is net income divided by net sales. DHG has a rate of return on net sales ratio of 6.33% for year 11. This compared to the rate of return on net sales of 5.68% in year 10 and the industry quartiles of 7.55%, 6.12%, and 4.20% indicates strength. Management needs to continue reducing operating expenses to improve profitability.
Rate of return on total assets
The rate of return on total assets ratio is an indication of a company’s ability to effectively uses...

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