FINANCE ACCOUNTING - Essay Example

Memorandum In order to present the company’s performance for the year 12, it was made an analysis of the most representative financial ratios, and a comparison with the industry performance. The comparison with the industry norm supports the research of Elliot and Elliot (2011), because it gives the company the opportunity to be judged directly against its competitors from the industry, rather than only against its previous year’s results. These financial ratios were computed starting from a historical analysis of the balance sheet and income statement.

According to Needles and Powers (2010), the liquidity ratios (e.g. current, acid-test ratios) measure the company’s ability to fulfill its short-term obligations. The current ratio is below previous year value and is appropriate to the industry’s lower quartile, which can be a weakness for the company and signal issues with liquidity. The decline of this ratio compared with previous year can be explained by an increase in current liabilities of 21.69%. The same issue appears in the case of acid-test ratio, which is a more stringent measure of liquidity, by not including the inventory in the numerator.

The decrease in this ratio can also be attributed to current liabilities, because both ratios keep the same numerator. It is also lower than the industry’s lower quartile, which may suggest that the firm could have problems in paying its short-term bills. An operating efficiency indicator is the inventory turnover, which had a decreasing trend, and it is also a weakness compared with the industry’s performance. The decline can be attributed to the increase in inventory of almost 31.99%. Another operating efficiency ratio is accounts receivable turnover, which had the same negative evolution as the preceding ratio.

This decrease can be explained by a decrease in credit sales, although net sales have increased compared with year 11. It is also a weakness for the company, because is below the industry norm. The last operating efficiency ratio is day’s sales in receivable, which has increased compared with previous year suggesting that the company collects its receivable later. However, this ratio is appropriate to the industry’s lower quartile, suggesting strength for the company because it collects its receivables on time i.e. customers pay the goods and services bought on credit on the date these are due.

In order to have a perspective over the company’s capacity of repaying its debt, it was analyzed a coverage ratio i.e. times-interest earned ratio. This ratio registered values much higher than the industry’s upper quartile and to the previous year’s indicator, which signals a better capacity of meeting its interest payments. An improvement towards year 11’s value could attract creditors, which have the confidence that the firm is paying its obligations. A measure of the company’s use of debt is the leverage ratio, which is appropriate to the industry’s upper quartile, providing a good signal for the credit rating agencies.

It registered a decline compared to previous year’s indicator, which signals that the company primary uses the equity financing, without taking much advantage of the debt tax advantages. A measure of the profitability is return on sales, which is not concerning the company because it is appropriate to the industry’s median quartile. It had also improved compared with previous year due to an increase in net earnings of 22.76%. Another measure of profitability is the return on total assets, which is strength, compared with industry norm, suggesting that the company registers high profits in relation with the resources put.

It also registers an improvement compared to previous year’s indicator due to an increase in net income. An equity ratio is return on common equity, which is appropriate to the industry’s upper quartile, suggesting strength and a good signal for stockholders’ wealth. However, it is observed a minor decrease compared with previous year due to an increase in equity of 10.57%. Earnings per share are also appropriate to the industry’s upper quartile, signaling a positive situation for the stockholder’s wealth.

Moreover, it has improved compared with previous year due to an increase in net earnings of 22.76%. Another equity ratio i.e. P/E ratio is under the industry’s lower quartile, which can be considered a weakness for the company and can suggest an undervaluation in the market for the company’s stock. However, it can be observed an improvement compared with previous year’s ratio. The book value constitutes strength for the company because it is appropriate to the industry’s upper quartile.

Moreover, it can be observed an improvement compared with previous year, explained by an increase in equity of 10.57%. References Elliot, B., & Elliot, J. (2011). Financial accounting and reporting (14th ed.). London, LDN: Prentice Hall. Needles, B., & Powers, M. (2010). Principles of financial accounting (11th ed.). Boston, MA: South-Western College Pub.