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Financial Management Essay

830 words - 4 pages

1.    Compute these ratios for all four years of data.

| Year |20x1 |20X2 |20X3 |20X4 |
|Return on Sales |2.8% |2.8% |2.8% |2.8% |
|(Net Profit Margin) |  |  |  |  |
|  |  |  |  |  |
|Return on Equity |8.3% |14.3% |22.2% |30.8% |
...view middle of the document...

0 |0.0 |4.2 |5.3 |
|  |  |  |  |  |
|Debt to Equity |0.2 |0.4 |0.7 |0.7 |
|  |  |  |  |  |
|Fixed Asset Turnover |8.0 |16.0 |9.9 |11.8 |

2. Prepare an analysis evaluating the trends in these and any other ratios you feel are appropriate, based on the statistics provided. Identify the events or situations that have caused the changes in the ratios from year to year.

• Return on Sales – The ratio for years 1 through 4 is constant and, this reflects the company’s operating profit margin. At a current percentage of 2.8 year over year. The company financial statements supported by the ROS percentage ratio indicate that the company’s net sales, cost of sales and net income double year on year thus reflecting growth in income.

• Return on Equity – The ratio’s reflect a significant growth year on year. The growth from year 1 to year 2 is 6%, the growth the following year is 7.9% and then growth in from year 3 into year 4 is 8.6%. This company is definitely profitable and this suggests the shareholders are seeing a return on their investment.

• Average Collection Period – This Company has maintained a constant average collection period of 30.4 days year on year. This is an acceptable collection period for the company’s accounts receivable. The constant rate suggests that the accounts receivables of the company are adequately managed and thus the business should constantly be able to meet its debt obligation.

• Inventory Turnover – The company’s inventory turnover is relatively high which could suggest inefficient purchasing of inventory, however when the later computed ratios are taken into account, an assumption of strong sales can be drawn.

• Current Ratio – The Company’s current ratio remains above 1 over the four years and this suggests that the company can meet its short-term debt obligation. The ratio in the 1st year is high and then it begins a steady decline year on year. The gradual decline may be a cause for concern as this could be a warning sign of...

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