Prepare an interpretation of the ratio trends below. While each of the 14 ratios
ID: 455090 • Letter: P
Question
Prepare an interpretation of the ratio trends below. While each of the 14 ratios should be interpreted, an integrated holistic analysis is preferred to a list. No more than one single spaced typed page is allowed, for this portion, although thorough discussion is required. Please consider your audience when you write this, as you would any written work.
Ratio Computation 2015 2014 2013 Working Capital 6,692.60 1437.6 1880.1 Current ratio 3.27:1 1.52:1 1.59:1 Quick Ratio 3.05:1 1.20:1 1.30:1 Debt to Equity 4.35:1 1.66:1 1.29:1 Debt to Assets 0.81:1 0.62:1 0.56:1 Asset Turnover (an efficiency measure) 0.7 0.77 0.75 Return on Sales or Net Profit Margin (a profitability measure) 0.18 0.17 0.2 Return on equity 0.1 0.11 0.13 Return on Investment 0.13 0.13 0.16 Earnings Per Share 4.79 4.82 5.55 Price-earnings ratio 89.5 82.19 68.82 A/R Turnover ratio & Average Days to Collect 20.22 21.66 20.86 Inventory Turnover & Average Days to Sell 52.85 52.46 51.84 Times Interest Earned 11.19 13.79 16.63 Dividend Yield 0.029 0.035 0.032Explanation / Answer
Formula (if Any)
Explanation
From 2013 to 2014
From 2014 to 2015
Decision wr.t. case
Working Capital = Current Assets - Current Liabilities
Working capital is a measure of how efficient a company is in managing in its short term financing
Decreased
Increased
Fluctuating
(not good)
Current Assets / Current Liabilities
Measures liquidity of a company and strength in term of pay back its debts
Slightly decreased
Increased
Slight Fluctuation but Improving
(Current Assets - Inventories) / Current liabilities
Also known as Acid Test ratio. Measures all liquid current assets against the current liabilities.
Slightly decreased
Increased
Fluctuating
Total Liabilities / Shareholder’s equity
It compares suppliers. Lenders commitment to the company versus the shareholder’s
Slightly Increased
Increased
Too much short term debt (not a good sign)
Total debt (short term + long term) / Total Assets
This is also known as leverage ratio. Shows how much lenders trust the company and showcase company’s borrowing capacity.
Slightly Increased
Increased
Company has borrowed a huge short term debt
Revenue / Total Assets
How good a company utilizing all the resources at its disposal
Slightly Increased
Decreased
Resource utilization is decreasing. (not a welcoming gesture )
Net Profit / Revenue
Term explains itself; it depicts the profitability of its product. How much is the share of profit in each dollar earned
Decreased
Slightly Increased
Trying to improve but not a major breakthrough
Net Income / Shareholder’s equity
How much profit company generates out of every single penny invested by shareholders
Slightly Decreased
Slightly Decreased
Diminishing returns, Investors can start pulling their money
Profit generated from the investment / total cost of investment
It shows how much profitable was one’s investment decision
Decreased
As Is
Nothing much has been gained out of investments made by the company
(Net Income – Proffered dividend ) / Average outstanding Shares
Very important variable in determining share price of a company. Higher ratio better can be the outlook of company if equity investments are not significant
Decreased
As Is
Earnings are steady
Market Value per share / Earnings per share
It indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings.
Increased
Increased
High speculation from investors and high expectations of company’s growth
(Days*Avg. Account receivables) / Credit Sales
It shows the average collection period for any business. Lower the better
Slightly Increased
Slightly Decreased
Not much to judge here. Company is trying to maintaining it.
Sales / Inventory
It should be compared against industry standards and competitors. Lower turns means poor sales and excess inventory
Slightly Increased
Slightly Increased
Company is maintaining it.
EBIT / total interest payable
company's ability to meet its debt obligations
Decreased
Decreased
Paying less and less interest back where as borrowing has increased
Dividend per share / price per share
How much cash flow a company is generating against every dollar invested in equity
Slightly Increased
Decreased
Not so steady returns. Investors may start pulling money anytime
Overall Conclusion:
Company has borrowed a huge short term debt in order to increase profit margin of its product or it is spending in huge R&D projects to get a major breakthrough but they are not really successful this year and can’t see the situation is improving anywhere in the near future. Even thy have slowly started defaulting in payback. Not a better company to invest in !
Formula (if Any)
Explanation
From 2013 to 2014
From 2014 to 2015
Decision wr.t. case
Working Capital = Current Assets - Current Liabilities
Working capital is a measure of how efficient a company is in managing in its short term financing
Decreased
Increased
Fluctuating
(not good)
Current Assets / Current Liabilities
Measures liquidity of a company and strength in term of pay back its debts
Slightly decreased
Increased
Slight Fluctuation but Improving
(Current Assets - Inventories) / Current liabilities
Also known as Acid Test ratio. Measures all liquid current assets against the current liabilities.
Slightly decreased
Increased
Fluctuating
Total Liabilities / Shareholder’s equity
It compares suppliers. Lenders commitment to the company versus the shareholder’s
Slightly Increased
Increased
Too much short term debt (not a good sign)
Total debt (short term + long term) / Total Assets
This is also known as leverage ratio. Shows how much lenders trust the company and showcase company’s borrowing capacity.
Slightly Increased
Increased
Company has borrowed a huge short term debt
Revenue / Total Assets
How good a company utilizing all the resources at its disposal
Slightly Increased
Decreased
Resource utilization is decreasing. (not a welcoming gesture )
Net Profit / Revenue
Term explains itself; it depicts the profitability of its product. How much is the share of profit in each dollar earned
Decreased
Slightly Increased
Trying to improve but not a major breakthrough
Net Income / Shareholder’s equity
How much profit company generates out of every single penny invested by shareholders
Slightly Decreased
Slightly Decreased
Diminishing returns, Investors can start pulling their money
Profit generated from the investment / total cost of investment
It shows how much profitable was one’s investment decision
Decreased
As Is
Nothing much has been gained out of investments made by the company
(Net Income – Proffered dividend ) / Average outstanding Shares
Very important variable in determining share price of a company. Higher ratio better can be the outlook of company if equity investments are not significant
Decreased
As Is
Earnings are steady
Market Value per share / Earnings per share
It indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings.
Increased
Increased
High speculation from investors and high expectations of company’s growth
(Days*Avg. Account receivables) / Credit Sales
It shows the average collection period for any business. Lower the better
Slightly Increased
Slightly Decreased
Not much to judge here. Company is trying to maintaining it.
Sales / Inventory
It should be compared against industry standards and competitors. Lower turns means poor sales and excess inventory
Slightly Increased
Slightly Increased
Company is maintaining it.
EBIT / total interest payable
company's ability to meet its debt obligations
Decreased
Decreased
Paying less and less interest back where as borrowing has increased
Dividend per share / price per share
How much cash flow a company is generating against every dollar invested in equity
Slightly Increased
Decreased
Not so steady returns. Investors may start pulling money anytime