The ratios analyze the ability to pay off its current liabilities as they become due as
well as their long-term liabilities. The ratios show the cash levels and turn the assets into cash to
pay off the liabilities and current liabilities. (Kimmel,Weygandt & Kieso, 2008)
Profitability ratios
compare income statement to show the company’s ability to generate profit
from his operations. The return on equity, return on investment and return on sales. The return on
sales expresses the relationship between the net profits to that of sales. The company’s net profit
margin is 3.9%. The value of the profit margin is too low. The value indicates that the firm’s
profit is not able to support its growth. Therefore, the company may not be efficient enough to
convert sales into profit. The ratio is too bad hence the company should look for a solution to
increase the profit margin.
Return on investment
The return on investment measures how profitable an investment venture is. It measures
how efficient the investor measures the dollar produces the profit. A positive return on
investment is considered good as it will recoup the profit. In this case, the ROI is 12.36 which
are regarded as a relatively good value. To improve the Return on investment, the company
should focus on increasing the profit generated by increasing the sales through promotion and
expansion. ( Gibson, 2009)
Return on equity
The Return on Equity ratio measures how sufficient the company’s ability to make
profits from shareholder’s investment. (Kimmel,Weygandt & Kieso, 2008) .ROE is an indicator
of the effectiveness of the company’s management is in using equity finance to fund the
operation of the company. The return on equity for the company is 16.2% which is considered to
be a good ratio. However, investors would consider a higher return on equity of more than 16.2%
to be favorable. To improve the ROE, the company needs to look for the alternative that would
increase the profit such as aggressive marketing, providing differentiated product and being
unique in the market.
Break-even analysis
The Break-even (dollars) is a ratio that computes the margin of safety by comparing
the revenue amount by what needs to be sold to cover for fixed and variable cost ( Gibson, 2009)
.The break-even is expressed by fixed cost divided by contribution margin. The break-even value
lower than one is considered to be good. To improve the ratio, the company needs to focus on
ways that need to minimize the cost to cover for the fixed and variable cost faster using a small
number of units. (Kimmel,Weygandt & Kieso, 2008).
Cash to total assets
The vertical analysis of balance sheet provides an assessment of the company, for
example, the company’s cash to total assets is expressed as cash to the total assets as 6.5%.the
ratio is bad. The company should strive to increase the cash value by either change the payment
method to cash on delivery and pay the supplier using other means such as cheques among
others.
Current liabilities to total liabilities
The vertical analysis of the income statement which expresses the current liability to
total liabilities as 18% the ratio is bad since it is a higher value. The company should strive to
pay off the current liabilities in time
Equity to total liabilities and equity
The equity to total liabilities and equity is 63%. The analysis is used for comparing
common sized analysis since the components are expressed as the percentage of the number (
Gibson, 2009) .the ratio of 63% in equity is good. However, the company should strive to invest
more in equity to increase the value of the company.
Long –term debt to total liabilities.
The long-term debt to the total liabilities and equities is 19.5%. the percentage is bad
since the component of long term debt should be reduced to reduce the company’s leverage
level. To solve the problem the company should increase the equity investment level and resort
to other short term borrowing.
Long-term debt to total liabilities.
The long-term debt to total liabilities and equity is 37.5%.the value is bad for the
company. To increase the company’s actual value, the long-term debt value should be as
minimum as possible. Therefore, the company should opt for short-term borrowing than long-
term financing.
The leverage ratio
The ratio measures the value of equity in a company compared to the overall debt and
measures the true value of the company’s equity in business.
Debt to Equity
The debt to equity ratio is 31% which is a risk value for the investors and creditors.
Therefore, the debt to equity is bad. The investors should concentrate on increasing the equity
value and reduce the liabilities.
Current ratio
The current ratio measures the firm’s ability to current liabilities to the current asset. The
company’s current ratio is average since the company’s current asset can pay its current
liabilities. The current ratio shows an increasing trend from 2014 -2015. The company should
strive to increase the current asset such as an emphasis on cash on delivery method of payment
and other short-term investment.
The working capital and non-working capital
The company’s working capital and non- working capital for the company is good.
165,000.the Company should maintain positive working capital by increasing the current assets
Working capital turnover
The working capital turns over measures the working capital to that of sales. The
higher the ratio, the better the company’s performance. The company’s working turnover is 5.25.
this ratio is good. The company should focus on maintaining the current working capital turnover
or increasing the current assets.
Assets turn over
The company’s asset turnover is 2.6 times. The ratio is good since the company’s asset
can generate sales. The company should focus to increase the sales through rapid and aggressive
sales campaign to increase the turnover. (Tamari, 2008)
Cash usage ratio
The daily cash usage is 9.13 times which indicates that the business usage of cash is
bad. The company should focus on methods that are aimed to reduce the current daily cash
usage. The company should try to reduce the daily cash used by the company since a higher cash
usage implies lower cash saved or retained which could lead the company to l problems during
financial crises.
Inventory turns over and inventory period
Similarly, the company’s inventory period is bad; an inventory period of 73 days is a
higher value. The company’s inventory turnover is 4.4, a relatively good value for the business’s
performance. The higher the inventory turnover, the better the company’s’ performance. The
company should focus on reducing the inventory period to a lower value during lower sales. The
company should also focus on reducing the receivable outstanding time to the lower value in
days than 40.15 days. The company should strive to adopt cash on delivery or cash with order
policy to reduce the receivable collection period. It is because it will minimize the risk of bad debts.
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