BALLI Supply INC. Financial Analysis Before making investment decision, a potential investor has to consider the expected return on the investment by analyzing the performance of the firm. Ratio analysis is one of the ways through which an investor can use to determine whether to invest or not invest in a company (Reilly 56). The use of various accounting ratios or parameters can result into conflicting results. However, investors will make the decision based on the factor it considers most pressing. Trend Analysis for Net Sales and Net Income Taking 2006 as the base year, it would be advisable to invest in the stock of BALLI.
In 2006, the net sales $137634 and increased throughout to $244524 in 2010. This is percentage increase in 77.66% compared to the 2006 sales, a value that is significant and therefore worth investing in. A trend analysis in the net sales shows a continuous increase. However, the increase in the net sales has been in a declining percentage. The fact that the increases are positive makes the investments worth. Considering the net income as a parameter of making the investment, the investments would be worth.
This is because the net income rose throughout the years from $4430 in 2006 to $8039 in 2010, a 81.47% increase. The net income also increased by 20% between 2009 and 2010. The return on the investors’ income is therefore worth and positive. Profitability Analysis Return on assets and that on shareholders equity are two profitability ratios that can be used in evaluating investment decisions. Investing in BALLI stock would be unprofitable if return on assets is considered as the determinant. In 2006, BALLI realized a return on assets of 9.6% which is above all the other percentages from 2007 to 2010 i. e.
9.6% in 2006 is higher than 9.2% in 2010. The return on equity also changed adversely from 22.4% in 2006 to 21.6% in 2010. Any rate below 22.4% would lead to non-investment in the company, as the 2006 rate is the base rate. Measuring Ability to Sell Inventory The ability to sell inventory is measured by the inventory turnover. Inventory turnover measures the duration taken by a company in holding stock before they are sold (Reilly 59).
A higher inventory turnover is healthy since it increases the speed at which stock is sold hence increasing the sales turnover. In the case of BALLI, the inventory turnover improved from 6.25 to 7.7 in 2010. The inventory turnover was 7.03, 7.29, and 7.78 in 2007, 2008 and 2009 respectively. All these values are above the base rate turnover hence this parameter will make investors put their resources in the company. Measuring Ability to Pay Debts Ability to pay debts is measured by considering the liquidity ratio.
The current ratio can be used to help in arriving at the investment decision. In 2006, BALLI had current ratio of 1.3 while the rate in 2010 was 0.9. The current ratio remained below that of the base year throughout the period. Investing in BALLI would therefore pose liquidity threat, as the current assets are insufficient to pay the current liabilities making the investment not worth. Measuring Dividends Dividend is the amount of returns distributed to the shareholders of the firm. Investors who refer at the amount of dividends paid will consider the amount of dividends paid when making investment decisions.
In 2006, BALLI paid a dividend of 0.16, 0.20 in 2007, 0.24 in 2008, 0.28 in 2009, and 0.30 in 2010. The increase in the amounts of dividends paid will make the investment be pursued. Investment decision requires a comprehensive analysis into the performance of the firm. Ratios can be used in making the decisions. The investors’ expectation will however determine the most important parameter to use in the analysis. Appendix Calculation of the inventory turnover Year Inventory turnover= 2006 =6.25 2007 =7.03 2008 =7.29 2009 =7.78 2010 =7.7 Work Cited Reilly, Frank K..
Investment Analysis and Portfolio Management. 2nd ed. Chicago: Dryden Press, 2005. Print.