Question

I am hoping to analyze a company with the following ratios. Any thoughts or conclusions regarding the below?

Profitability	Gross Margin: 29.79 Operating Margin: -0.17 Return on Assets: -1.48 Return on Equity: -7.83 Return on Total Capital: -2.67
Efficiency	Receivables Turnover: 2.89 Total Asset Turnover: 0.32
Capital	Total Debt to Total Equity: 209.46 Total Debt to Total Capital: 67.68 Total Debt to Total Assets: 35.61 Long term Debt to Equity: 172.05 Long term Debt to Total Capital: 55.60
Liquidity	Current Ratio: 1.37 Quick Ratio: 1.09 Cash Ratio: 0.56

Answer 1

Let’s analyze performance of this company on the basis of given ratios;

1. Gross Margin of this company is satisfactory hence it is true that this company is earning sufficient sales revenue in compare to cost of goods manufactured.

2. Operating margin of this company is not satisfactory because operating margin is negative hence it is clear that this company is facing problems of operating inefficiency. In other words we can say that company’s operating expenses are more than desired level.

3. Return on assets is also unsatisfactory because this ratio is negative. This shows that company is generating low amount of net income in compare to total investment in assets.

4. Return on capital employed is also unsatisfactory because this ratio is negative. This shows that company is generating low amount of net income in compare to total total capital employed.

5. Receivables Turnover ratio is also below than par because in compare to accounts receivable net credit sales is low. Thus company need to either increase its credit sales or try to reduce balance of accounts receivable.

6. Assets turnover ratio is also not satisfactory because 0.32 ratio is very low because in compare to total assets net sales is low hence volume of sales need to be increased.

7. Total Debt to Total Equity ratio is very high. This shows that company is operating on higher volume of debts in compare to equity. Hence this proves that company is paying higher amount of interest on debts and due to this condition profitability is negatively affected.

8. Total Debt to Total Capital ratio is also high because more than 50% of total capital is employed by debts. This shows that company is operating on higher volume of debts in compare to equity. Hence this proves that company is paying higher amount of interest on debts and due to this condition profitability is negatively affected.

9. Long-term debt to Total assets ratio is looking reasonable because it is 35.61. This shows that there will be a greater portion of short-term debts in the balance sheet of the company too.

10. Long-term debt to Equity ratio is also high because it is 172.05%. This shows that company is operating on higher volume of long-term debts debts in compare to equity. Hence this proves that company is paying higher amount of interest on debts and due to this condition profitability is negatively affected.

11. Long-term debt to Capital employed ratio is also high because it is 55.60. This shows that company there is more than half portion of capital is covered by long-term debts hence this may leads to over burden of interest payment for company.

12. Current ratio of company is 1.37 that means company have sufficient liquidity to cover its’ current liabilities but we know that current ratio should be double to its’ current liabilities. So on this basis we can say that company should try to increase its’ current assets or should try to decrease its’ current liabilities for improving position of current ratio.

13. Quick ratio of the company is satisfactory because it is more than 1. And as per standard quick ratio more than is satisfactory.

14. Cash ratio of company is not satisfactory because it is less than 1. Cash ratio of 0.56 shows that company have less cash in compare to current liabilities which is negative for the company.

Overall we can say that company have some faults in its’ profitability, long-term solvency, efficiency and liquidity as well. Hence company need to take required actions for improving these ratios.