Question

You have been appointed as a financial analyst by Ramada Co. Ramada Co has identified Applied Co as a possible acquisition within the same industry. Your role is to critically assess the financial performance and conditions of Applied Co and highlights area of concerns to the members of Ramada’s board of directors.

The following are the key financial data and information for recent years ending 31 December

Applied Co	2017	Industry average KPI
Gross profit margins %	61	45
Operating profit margins %	37.6	28
Days of account receivable outstanding (days)	40	41
Current ratio	1:1	1.6:1
Quick ratio	0.57:1	1.4:1
Debt/ equity ratio %	220	240

Required:

Prepare a report for the Ramada’s board of directors. In your report you should  

1. Critically analyze and discuss the recent financial performance and financial conditions of Squair Co and highlight areas of concern for the future
2. State clearly any limitations and assumptions that you made in your calculations.
3. Marks will be awarded for Professional format, structure and presentation of the report.

Answer 1

Report to Ramada’s Board of Directors

To

The Board of Directors

Ramada Co.

Sub : Financial Analysis of Applied Co.

Dear all,

On critically analyzing the key financial metrics of our possible target acquisition - Applied Co. for the year 2017, i have found the following noteworthy points :

1. Performance of Applied co. in the profitability front has been very good. Gross profit margin and operating profit margin for 2017 has been way above our industry average. This signifies that it outperforms majority of competitors and thus has huge growth potential.

2. The performance in solvency domain has been satisfactory/average as Applied Co's days of accounts receivable collection is 40 days which is just at par with the industry average of 41 days. Better collection management can improve this aspect.

3. Liquidity is a matter of concern for Applied Co. The current ratio was much below the industry standard. Also, the quick ratio is very low at 0.57 : 1, while industry maintains it at 1.4 : 1. This means Applied co. does not hold much of liquid assets or quick assets with itself to honor its current obligations. It may face liquidity crisis which can seriously hit its business continuity.

4. Capital structure was at par with industry average. Though debt-equity ratio is high at 220%, but the industry average of 240% suggests that use of high debt (leverage) is a common practice and requirement of our industry. Hence, this area is not a matter of concern.

Overall, Applied Co. has good financial performance barring the liquidity factor, which can be definitely improved with proper liquidity management.

I hope you find my analysis of Applied co. insightful and this will help you further in decision making on Acquisition of Applied co. Please let me know in case anything further is required out of me.

Thanks and Regards,

Name

(Financial Analyst)