In: Finance
1) The total debt to equity ratio has slightly reduced from
(75/25) =3 in 2016 to 74/26 = 2.84 in 2017.
The reduction in capital percentage indicates the significant
increase in the retained earnings since it is unlikely that most of
the paid up capital would be bought back. This also means that the
absolute size of the balance sheet has increased almost 3 times
provided the absolute value of capital did not change (No buy back
or fund raising through new shares)
2) Cash as a percentage of assets have significantly reduced
although the PPE have not increased in percentage terms. This means
the cash could have been used for either of the two purpose:
First- The cash could have been used to buy back shares since the
capital has also reduced, although its unlikely that a company
would buy back 2/3rd of its shares in a single financial year
Second- Cash was used to fund the operations, this is more likely
since the Short term loan as a percentage of the total has
significantly reduced and one cannot fund majority of operating
activities with long term loan since this would cause asset
liability mismatch.
Hence the only means to support the increase in cost of goods could
have through the available cash.
3) The financing of the company seems to have been majorly done
through Long Term Debt since it has increased from 15% in 2016 to
22% in 2017.
This could have been done to support the growth of the company.
Although the PPE has not increased in percentage terms it is
possible that the value has increased in absolute terms which could
have been financed by the long term loan.
The financing of the operating activities seem to have shifted from
dependancy on Short Term Loans to available Cash. There by reducing
the interest expense and using the cash reserve which would not
have resulted in any income.
There also a probability that the cash wasn't alone sufficient to
fund the operations and it is possible that some of the Long Term
Debt was used to fund the increase in the working capital, which
may not have been a wise decision since Long term debt usually has
a higher interest rate than short term debt and should only be used
to fund long term capex
4)
Analysis of Profitbility:
From the profitability perspective the significant increase in the
Retained Earnings show that the company has made profit in the 2017
Financial Year.
Analysis of Risk:
The total Debt to Equity ratio has reduced in the year 2017 from 3
to 2.84 hence the company is now slightly less riskier. But as I
mentioned in the previous answer a part of the increase in Working
Capital was probably funded by Long Term liability hence the chance
of asset liability mismatch arises and interest cost could have
been reduced by taking a short term working capital loan of the
same amount and that would have reduced the financial leverage
(EBIT/EBT)
Analysis of Liquidity:
The current ratio (Total current asset/total current liability) in
2016 was (52/60) = 0.87 and in 2017 it is (60/52)=1.15. This
increase shows improvement in liquidity
But if we analyse the quick ratio (Total current
asset-Inventory)/total current liability we will find in 2016 the
value to be (32/60)=0.53 while it has reduced to (25/52)=0.48 in
2017
From this we can draw the conclusion that the liquidity of the
company is dependent on the nature of the inventory and if the
inventory cannot be sold easily due to some unforeseen circumstance
the company might end up facing liquidity issues.