Financial statements like budget, income statement, event report, and balance sheet of institute display the institutes financial conditions to the shareholders (Kohl & Wilson, 2004). As a result, this paper will demonstrate how financial statements derive financial ratios of Edens Garden Company as shown in appendices and how the financial ratios evaluates the financial stability of the firm. Moreover, it will express the aspects of a financial analyst such as deciding, scrutinizing, and inferring the information from financial statements before advising the management of the financial circumstances regarding the companys performance (Drake).
Comparison between Individual Financial Ratios
In consequence, the ratio analysis process considers various ratios. However, an unaccompanied ratio lies when determining the company performance. To acquire admirable analysis, it requires comparison of various ratios between themselves and competitors. This leads to four groups of financial ratios, which include liquidity, leverage, operating, and profitability ratios.
The liquid ratios determine the ability of the business meeting its instantaneous short-term financial obligations through committing the companys available cash or current assets (Drake). The liquidity ratios consist of current and quick ratios. Current ratio indicates a companys capability to match its recent liability with the companys existing assets while the quick ratio demonstrates how a corporation can equivalent its present liabilities to the corporations most liquid assets (Drake). As a result, when these ratios are bigger, they illustrate a higher companys ability to satisfy its pressing financial requirement.
In the Edens Gardens case, the calculated current and quick ratios are 1.5 and 0.5 respectively as shown in appendices A and B correspondingly. This means Edens Garden assets can meet its current liabilities. Moreover, the current ratios of Edens Garden are optimal. Therefore, Edens Garden is investing the right profit making assets to maximize its productivity. However, Edens Garden is operating in a long-term phase. As a result, Edens Garden should consider improving its liquid assets, which would signal the tying up of cash in the inventories kept for long-term creation (Drake).
On the other hand, profitability ratios compare income mechanisms with sales (Drake). The profitability ratios comprise the net profit to sales ratio and net profit to equity ratio. Net sales to profit ratio establishes the rate of profit for every sale undertaken while the net profit to equity sets up how the investment is earning profit from the invested capital. In the case of Edens Garden, the profit per sales ratio is 4.3 and net profit to equity is 10.7 as calculated in appendices L and M respectively. Hence, this is an appropriate investment as the invested capital by Edens Garden has a high return.
However, net profit per sales requires determination of the operating ratios to draw a valid conclusion. In consequence, operating ratios quantify assets the firm. The operating ratios therefore take account of average inventory turnover ratio, average collection period ratio, Average collection Period in days, payable period ratio, net sales to total assets ratio and the net sales to working capital ratio (Drake). In the Edens Garden calculations shown in appendices E, F, G, H, J, and K, the results of the average inventory turnover ratio, average collection period ratio, average payable period ratio, net sales to total assets ratio and the net sales to working capital ratio include 24.5, 36.8, 81.10 days, 180.0, 2.5, and 3.4 respectively.
Edens Garden therefore has high development potential, procures effectiveness given that it creates and sells almost twenty-six inventories in a year. Moreover, Edens Garden rate of payable accounts turning over is 180.0. This shows that Edens Garden has a high source of cash to pay the suppliers or expand the business if well utilized.
What is more, Edens Garden net sales shows it has a low expected ratio of working cost as proven by the low net profit per sales; however, the returns expected from the assets invested are low. This means Edens Gardens assets are not properly utilized to generate profits to the firms maximum limit. Consequently, Edens Garden is unable to meet its liabilities due to poor utilization of the invested capital leading to lower returns from Edens Gardens investments. Thus, Edens Garden can improve how it invests its working and fixed assets.
The last financial analysis group incorporates financial leverage ratios. The financial leverage ratios determine how much risk the company faces. These ratios include debt ratio, and the times interest earned ratio. The debt ratio indicates a company debt level whereas times interest earned ratio shows the companys ability to pay interest on time (Schmidt, 1997). From the Edens Garden business information, debt ratio and the times interest earned ratio results after calculation as shown in appendices C and D are 0.1 and 2.4 correspondingly.
Consequently, Edens Garden is not utilizing its debt full potential to expand its operations as proved by the debt ratio of 0.1 and the firm’s potential to pay its interest 2.4 times per year. The management of Edens Garden should ensure they obtain the optimum amount of debt to increase production and hasten Edens Garden Expansion.
Comparison between Competitors Financial Ratios
|Ratio comparison||Edens Garden||Garden Supply Industry Median|
|Debt to net worth||1.8|
|Times interest earned||2.4||2.6|
|Average inventory turnover ratio||24.5||5.6|
|Average collection period ratio||36.8||9|
|Average payable period ratio||180.0||17|
|Net sales to total assets ratio||2.5||3.0|
|Net sales to working capital ratio||3.4||16.6|
|Net profit on sales ratio||4.3||7.5%|
|Net profit to equity ratio||10.7||15.0%|
In conclusion, Edens Garden can improve the way it avails finances by borrowing to match its competitors debt ratio and this will help to pay the supplier expenses.
Drake, P. P. Financial Ratio Analysis. Web.
Kohl, D., & Wilson, T. (2004). Business Tools: Understanding Key Financial Ratio and Benchmarks. Spokane: North West Farm Credit Service.
Schmidt, C. (1997). Ontario Ministry of Agriculture and Food. Web.
Appendix A: Calculating Current Ratio
Current ratio/Working Capital Ratio= =
Appendix B: Calculating Quick Ratio
Quick ratio/Acid test= =
Appendix C: Calculating Debt Ratio
Debt ratio = =
Appendix D: Calculating Times Interest Turn Over
Times-interest-coverage ratio= =
Appendix E: Calculating Average Inventory Turnover Ratio
Average inventory turnover = =
Appendix F: Calculating Average Collection Period
Average collection period = =
Appendix G: Calculating Average collection Period in Days
Number of days inventory = =
Appendix H: Calculating Average Payable Period
Average payable period = = =
Appendix I: Calculating Payable Period in Days
Payable period in days = =
Appendix J: Calculating Net Sales to Net Assets
Net sales to net assets = =
Appendix K: Calculating Net Sales to Working Capital
Net sales to working capital = =
Appendix L: Calculating Net Profit on Sales
Net profit on sales = =
Appendix M: Calculating Net Profit on Equity
Net profit on equity = = .