The paper "Financial Profitability Ratio Analysis" is a great example of a report on finance and accounting. Current ratio = current assets ÷ current liabilities 2010 Current ratio = 423041÷ 221,990 = 1.9 2009 Current ratio = 295,912÷ 243,812 = 1.2 2008 Current ratio = 374287÷ 323,919 = 1.15 Year 2008 2009 2010 Current ratio 1.15 1.2 1.9 Financial profitability ratio Debt ratio = total liabilities ÷ total assets 2010 Debt ratio = (477,628 ÷ 730,692) = 0.65 2009 Debt ratio = (460,066 ÷ 665,310) = 0.69 2008 Debt ratio = (534,436÷ 767,858) = 0.696 Year 2008 2009 2010 Debt ratio 0.696 0.69 0.65 Capitalization ratio = total assets ÷ total equity 2010 Capitalization ratio = 730,692÷ 253,064 =2.88 2009 Capitalization ratio =665,310÷ 205,244 = 3.24 2008 Capitalization ratio =767,858÷ 234,043 = 3.28 Years 2008 2009 2010 Capitalization ratio 2.88 3.24 3.28 D-Analysis report The profitability ratio indicates that the firm has not performed very well in the recent past.
The profit margin was as follows: Year 2008 2009 2010 Profit margin 0.0736 0.0272 0.016 From the ratio, it can be seen that the company did not perform well in the three year period. The profit margin in 2008 and 2009 was very small. This shows that the gross profit was very low and the company made losses in 2008 and 2008. The profit margin improved in 2010, and it can be seen that the company recovered from making a loss of earning a profit in 2010.
The highest loss was made in 2009 and this was a further drop from the loss that was made in 2008. The company has to further improve its performance if it has to attract prospective investors. The business enterprise is yet to become a convincing profitable company. Two losses in a row are alarming for any investor (Palepu & Healy, 2008). The inventory turnover shows that the company was able to turn its inventory many times. Year 2008 2009 2010 Inventory turnover 10 32 20 Seemingly the inventory was highest in 2009 but surprisingly it is when the company made a huge loss.
The inventory was turned less in 2010 but the company ended up registering a positive improvement on profitability. In 2008, the inventory turnover was lowest. The current ratio indicates that the company has a low liquidity level. However, the liquidity level has improved over the year to reach an impressive 1.9 in 2010. The ideal liquidity ratio is 2 whereby the assets are expected to be two times more than the liabilities. Year 2008 2009 2010 Current ratio 1.15 1.2 1.9 The improvement of the liquidity ratio shows that the company has positioned itself to be effective to meet its short term debts.
The improvement will improve the image of the company and attract more investors. The debt ratio of the company has fluctuated over the years. The debt ratio is still very high meaning that the company owes a lot to the creditors and hence it jeopardizes the capacity of the company to pay up its debts (Hooke, 2010). Year 2008 2009 2010 Debt ratio 0.68 0.69 0.65 The debt ratio of above 60% is high and makes the company be prone to external influence. Excessive debt capital in the company can lead to instability and bankruptcy when the company is unable to pay up its debts.
The company has to reduce debt capital and inject more equity capital (Kieso, Weygandt & Warfield, 2007). The capitalization ratio shows the reciprocal of the percentage of assets offered by shareholders and the level of using gearing. The ratio shows that the use of assets in the company is improving over time. Years 2008 2009 2010 Capitalization ratio 2.88 3.24 3.28 Despite the improvement, there is a lot that has to be done to fix the asset problem in the company. The limitation of this analysis is that one cannot see the operating activities that can be obtained for the company’ s cash flows.
There are some weaknesses or strengths of the company that cannot be deciphered by this kind of analysis. I would advise my parents not to invest in the company in its current position. The financial position of the company is still weak and it will take some monitoring of the developing trend in order to tell whether the company can be invested into. The company has to be financially stable and profitable in order to attract potential investors.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2007). Intermediate Accounting (12th ed.). Hoboken, NJ: John Wiley & Sons.
Palepu, K.G. & Healy, P.M. (2008). Business Analysis & Valuation: Using Financial Statements. New York: Cengage Learning.
Hooke, C.J. (2010). Security Analysis and Business Valuation on Wall Street + Companion Web Site: A Comprehensive Guide to Today's Valuation Methods. New York: John Wiley & Sons.
Gibson, C.H. (2010). Financial Reporting and Analysis: Using Financial Accounting Information. New York: Cengage Learning.
Powell, G. & Baker, K. (2005). Understanding Financial Management: A Practical Guide, New York: John Wiley & Sons.
Peterson, P.P. (2012). Analysis of Financial Statements. New York: John Wiley & Sons.
Brigham, E.F. & Daves, R.P. (2009). Intermediate Financial Management, New York: Cengage Learning.