Table of Contents
Short-Term Ratios
Long-Term Ratios
Asset Management Ratios
Profitability Ratios
Market Ratios
Conclusion
References
Short-Term Ratios
The analysis of short-term ratios (Table ) shows that the company can settle its short-term liabilities using the current assets and quick assets, but not in utilizing cash and its equivalents. Although the current ratio fluctuates, it increased from .5 times in 205 to 2.49 times in 208 due to the increasing amount of assets. The trend of quick ratio exhibits an increasing trend similar to that of the current ratio because it increased from .55 times in 205 to 2.42 times in 208, owing to the high proportion of quick assets. The quick ratio that is greater than one implies that quick assets, such as cash, marketable securities, and accounts receivables are adequate to settle current liabilities (Goel, 205). Further analysis of the liquidity of the company indicates that the cash ratio increased from 0.62 in 205 to 0.74 in 208 because of the growth in cash and marketable securities.
Table . Short-Term Financial Ratios.
205
206
207
208
Current ratio
.59 times
.8 times
.6 times
2.49 times
Quick ratio
.55 times
.78 times
.58 times
2.42 times
Cash ratio
0.62 times
0.8 times
0.70 times
0.74 times
Long-Term Ratios
The analysis of long-term ratios (Table 2) shows that the company can meet its liabilities over a considerable long period. Since the total debt ratio decreased from 0.43 times in 2005 to 0.37 times in 208, it means that the company has a manageable level of debt. Companies with low debt ratios are stable in financing their operations (Bragg, 208). The total debt ratio of 0.37 times implies that shareholders own the majority of assets (63%), while the creditors own the minority of assets (37%). The long-term debt ratio of the company is relatively stagnant because it was 0.22 times and 0.23 times in 205 and 208, respectively, with declines to 0.9 times in 206 and 0.2 times in 207. The low level of the long-term ratio indicates that the company can liquidate about 23% of its total assets to reimburse the long-term debt. The analysis of times interest earned (TIE) shows that it remained relatively constant with time because it increased from 9.20 times in 205 to 0.94 times and 0.44 times in 206 and 207, correspondingly, and then declined to 8.49 times in 208. TIE reveals that the company is stable and less at risk for bankruptcy because it can meet its financial obligations more than eight times. The cash coverage ratio of the company increased from 8.32 times in 205 to 9.23 times in 208 with increments to .76 times and .7 times in 206 and 207, respectively, due to an increase in cash and its equivalents.
Table 2. Long-Term Ratios.
205
206
207
208
Total debt ratio
0.43 times
0.37 times
0.36 times
0.37 times
Long term debt ratio
0.22 times
0.9 times
0.2 times
0.23 times
Times interest earned
9.20 times
0.94 times
0.44 times
8.49 times
Cash coverage ratio
8.32 times
.76 times
.7 times
9.23 times
Asset Management Ratios
The analysis of the asset management ratios (Table 3) reveals that the company is less effective and efficient in generating sales from its assets. High turnover rates on assets and short days in the collection of sales indicate effective and efficient management of assets (Brigham & Ehrhardt, 207). The inventory turnover ratio shows that sales increased by 7.22, 6.3, 2.29, and 7.79 times the average inventory in 205 through 208, in that order. The analysis of day sales inventory exhibits a decreasing trend from 50 days in 205 to 46 days in 208 with significantly lower days of 22 and 29 in 206 and 207, correspondingly. The receivable turnover increased from 0.92 in 205 to .23 in 208, which means that the company can collect 23% of its receivables in a year. The declining trend of day sales in receivables to 296 days in 208 from 396 days in 205 shows that the company is increasingly becoming efficient in collecting cash from its customers. The improvement in fixed asset turnover from 0.22 times in 205 to 0.28 times in 208 means that the company is less efficient in generating net sales from its fixed assets. The analysis of total asset turnover indicates an increasing trend from 0.2 times in 205 to 0.6 times in 206, which shows that the company is less efficient in generating sales from the average total assets.
Table 3. Asset Management Ratios.
205
206
207
208
Inventory turnover ratio
7.22 times
6.3 times
2.29 times
7.79 times
Day sales inventory
50 days
22 days
29 days
46 days
Receivable turnover
0.92 times
.37 times
.25 times
.23 times
Day sales in receivable
396 days
266 days
292 days
296 days
Fixed Asset turnover
0.22 times
0.30 times
0.30 times
0.28 times
Total Asset turnover
0.2 times
0.7 times
0.6 times
0.6 times
Profitability Ratios
The analysis of profitability ratios (Table 4) indicates that the company exhibits a decreasing trend in profits. Since the profit margin decreased from 55% in 205 to 29% in 208, it shows that the net income level of the company is decreasing rapidly with time. The decline in return on assets from 7% in 205 to 4.8% in 208 suggests that the companys assets are not efficient and effective in generating net income. Moreover, the decrease in return on equity from 2.6% in 205 to 7.6% in 208 implies that the company generates small profits for investors.
Table 4. Profitability Ratios.
205
206
207
208
Profit Margin
55%
44%
32%
29%
Return on assets
7%
7.7%
5.5%
4.8%
Return on equity
2.6%
2.4%
8.6%
7.6%
Market Ratios
According to the analysis of market ratios (Table 5), the company is not profitable to shareholders. Earnings per share declined from 0.323Dhs in 205 to 0.236Dhs in 208. Additionally, the price-earnings ratio decreased slightly from 7.8 times in 205 to 6.52 times in 208, which means that the company has a declining market performance.
Table 5. Market Ratio.
205
206
207
208
Earnings per share
0.323 dhs
0.354 dhs
0.254
0.236
Price-earnings ratio
7.8 times
7.42 times
8.66 times
6.52 times
Conclusion
The analysis of short-term and long-term financial ratios depicts that the company exhibits positive performance in liquidity and low debt burden. However, the analysis of asset management ratios indicates that the company is not efficient in turning over its assets because it has long days in sales inventory and receivables and low turnover rates in receivables, fixed assets, and total assets. Additionally, since the company has low and decreasing profitability ratios, investors should not buy its shares because they are not worthy of investment. The decreasing earnings per share and price-earnings ratio suggest that the company performs poorly in the market, and hence, it is not lucrative to invest in it.
References
Bragg, S. M. (208). The interpretation of financial statements (2nd ed.). Centennial, CO: AccountingTools.
Brigham, E. F., & Ehrhardt, M. C. (207). Financial management: Theory and practice. Boston, MA: Cengage Learning.
Goel, S. (205). Financial ratios. New York, NY: Business Expert Press.
