Statement Analysis, Essay Example

Introduction

This memo explains the financial condition of Company G, a company that operates a small chain of wholly owned home centers selling to consumers and contractors. Sales volume varies among the individual stores and ranges between $11 million and $20 million per year. The company is organized as a corporation and does not operate as a sub-chapter S corporation.

Looking at Company G’s liquidity ratios, the company has conflicting results. On the one hand, Company G seems to be in decent shape with a current ratio of 1.8; typically, a current ratio of 2:1 is assumed to be healthy thus this should not concern management. On the other hand, company G has an acid ratio under 1 (.40) – this means that a company does not have enough current assets to cover the liabilities over the short-term- this metric causes concern. When one looks to the long-term, however, the company has less issues: the debt ratio is far under 1 meaning that the company has enough assets to cover liabilities over the long-term. This metric is a strength for the firm. A further examination of how liabilities are structured vis-à-vis assets is needed to understand this imbalance.

Regarding larger issues of company efficiency, the issue of turnover, the issue boasts a high inventory turnover (5.20) that means it goes through inventory quickly and does not have product lying around. This is a strength for the company to examine. The company also shows robust financial management with an accounts receivable turnover ratio of 30.4- this essentially means that of the company’s total sales, a small percentage is composed of sales for which payment has not been received. This metric is a source of weakness meaning too many sales are not being collected.. This interpretation is also backed up by the days sales in receivables in which 12 days are composed of receivables. This metric is a source of strength.

There may be some financial issues that need attending to as CEO. Interest expenses are under control with current earnings accounting for roughly 35 times current interest payments. Executives should see this as a weakness. The company, however, should also work on increasing efficiencies as the rate of return on net sales is quite low- net income is only 6% of total sales which likely means there is a high cost base. This should not be an area of concern for executives. A thirteen percent return on sales is not poor- but should be examined further.

From an investor point of view, there is largely good news. There is a roughly 19% return on investment for common shareholder’s equity. This is a source of strength for the firm. The company also posted a decent return of 4 cents per share of common stock; in addition, the company has a fairy low price to earnings ratio of 4.6- this is likely a source of strength which means the stock is undervalued compared to peer firms. Finally, the book value for a common share is 5.89 which is decent for the company. Earnings per share for the firm is $1.04- a strength for the company as it roughly twice that of peer firms in the same industry, The rate of return on assets is roughly 13.80% a strength for the company versus other firms.

Comparing Company G to others, it seems to be in good shape. Looking at a number of websites, I could not get complete information for every ratio, but did find a few key ratios.

Company G’s turnover of 5.16 is similar to the home center industry’s of 5.4. Company G also has a similar current ratio (1.8) compared to the industry average 1.9. Company G is in an advantageous financial shape as other firms have a much higher debt to assets ratio- some well over 1. Finally, Company G’s return on assets of roughly 6% far exceeds that of the industry average of 1.4%. Overall Company G is in good shape compared to industry competitors.

Sources

Yahoo Finance

Google Finance

US Bureau of Statistics

Retailowner.com