Current ratio is the ratio of current assets to current liabilities which measures the liquidity of an organization. It also helps in analysing how fast the company can readily converts its assets into cash. (Clausen, 2009)
Current Ratio = Current Assets: Current Liabilities (Clausen, 2009)
= $ 180,742 / 105,064 = 1.72
Quick Ratio =(Trade Receivables + Short term investments + Cash and cash equivalents): Current Liabilities (Clausen, 2009)
(14,591 + 0 + 6271) / 105,064 = 0.19 or 0.20
|
Particulars |
Industry Average (other firms) |
Super Cheap |
|
Current Ratio |
1.76 |
1.72 |
|
Quick Ratio |
0.78 |
0.20 |
Ideally, as per the norms of the industry, current ratio should be more than 1. As per the above table, the current ratio of Super Cheap is lower than that of other firms. It means that the other firms are doing a little better than Super Cheap as far as paying off short term liabilities is concerned. The industry to which Super Cheap Auto Group belongs to fairly considers 1.5 to be the ideal state for current ratio but at the same time, other parameters are also required to be kept in consideration like, scale of business, debt-equity etc. Even for the quick ratio, the higher it is, the better it is for the company. As per the above table, the other firms are at far better position as compared to Super Cheap Auto Group. This shows that Super Cheap is not well versed in meeting off its liabilities at a faster rate as compared to the other firms (Clausen, 2009).
|
Time period |
Particulars |
Cents per share |
|
2006 |
Dividend |
8 |
|
2007 |
Dividend |
10.5 |
From the above table, it can be seen that there has been rise in dividend from 2006 to 2007 by 2.5 cents per share. One of the reason behind such state is company has cut down its expenditures in 2007 and is focused more on its earnings as compared to 2006. This clearly highlights the fact that Super Cheap Auto Group is moving forward towards its growth and expansion phase. Secondly, the increase in net profit from 2006 to 2007 is another reason as why there is increase in dividend. This is reciprocated by increase in the level of EPS from 15.5 to 21. Another sign is of retained earnings. From 2006 to 2007 there has been increase in level of retained earnings by $ 12,753. Borrowings are another factor where the benefits derived from borrowings exceeds the payment from borrowings reflected in the cash flow. The net effect is of $6934 (12200-5266). Overall, by judging the level of borrowings, the company is adopting long term finance route in order to flourish its business (Beaver, 1966).
c). Inventory turnover = COGS or COS / Average Inventory
COGS = Cost of Goods Sold
COS = Cost of Sales
Average Inventory = (Opening + Closing) Stock / 2
= $(135,021 + 159,880) / 2 = $ 147,450.5
Inventory Turnover = $ 376,733 / $ 147,450.5 = 2.55 times
Whereas, Inventory Days = 365 / Inventory Turnover = 365 / 2.55 = 143 days (r/off)
The above calculation shows that the inventory of Super Cheap Auto Group turns for 143 days around and 2.55 times a year. The calculation also portrays a fact that Super Cheap is blocking its funds by having higher level of inventory in stock. Since the funds of the company are getting blocked in it, this is one of the reason as why Super Cheap is having lower inventory turnover in its course of operations (Richards & Laughlin, 1980).
As per the financial statements of Super Cheap Auto Group, it can be concluded that its business has started pacing at an increasing rate. The business growth plan of Super Cheap can be decoded by having a look on the flow of money in the financial statements. The company is focus on increasing its level of borrowings and then ploughing back of profits into the business. This is the reason behind high level of Earnings and Dividend. As per my learning, Super Cheap can rely upon other sources of finance in terms of borrowing of funds like issuing of debentures. This will help in improving its credit rating as well other issues of credit management. Even they can go for other leading financial institutions for having a backed up financing for maintaining its debt-equity level. Rise from 2006 to 2007 has been due to funding of borrowings thereby leading to increase in profits, earnings, and dividends. For thriving in the near future, the company should crucially decide upon its nature and types of borrowings. They should choose those types which are cheaper and easier to repay (Beaver, 1966).
e). Price Earnings ratio reflects the strength of a company’s share price when compared to its earnings level.
Price Earnings Ratio = Market Price of the share / Earnings per share = $ 4.5 / $ 21 = 0.24
Dividend Yield Ratio = (Dividend per share / Market Price of the share) * 100
= (10.5 / 4.5) *100 = 233.33%
|
Particulars |
Sector (industry) |
Super Cheap Auto Group |
|
Dividend Yield Ratio |
3.7 % |
233.33% |
|
Price Earnings Ratio |
16.7 times |
0.24 times |
From the above table, it can be inferred that Super Cheap Auto Group is at a way better position in Dividend yield ratio when compared to the sector. This substantiates the fact that Super Cheap’s investment in the equity component is yielding high end cash flows. It also portrays that by providing higher level of dividend the company is trying to have a larger investor’s base in the market (Beaver, 1966).
As far as the Price Earnings ratio is concerned, Sector’s ratio is way higher than that of Super Cheap. This proves that the company is quite undervalued which can lead to a grave issue in the near future. Since the gap between the sector and the company is quite wide in range it is advised that the management of Super Cheap Auto Group should take a planned immediate action behind the cause and effect of lower Price Earnings ratio. But due to high level of earnings, its shares are worth it. Since the company is having higher dividend yield ratio, it has huge prospects of growth and development (Clausen, 2009).
Creditors, shareholders, management, and government are four different kinds of groups who are the common or general users of the financial statements.
Government and management are the two most known types of groups who require the financial statements. Based on the information mentioned in the financial statements they tend to make crucial decisions for their own sector. Government requires financial information so that they can wisely take decision of investment or funding a business of a company while the management is in the need of such kind of information so that they can evaluate their present condition both in economic and non-economic terms with their set of standards. They also tend to make vital decisions based on it in order to run its course of operations (Benjamin & Stanga, 1977).
Government analyses the position of a company through its financial statements. It checks whether the company has followed the due compliance, in line with the laws and is in line with the policies and procedures of a government. It also checks for its past records and tries to keep a track of its operations. For the management, it helps in evaluating past trend with the current position and thereby assessing the level of growth achieved. Both non-economic and economic factors are analysed with the help of it (Benjamin & Stanga, 1977).
As far as its limitations are concerned, it fails to quantify the non-economic factors for the management due to which it becomes difficult for them to plan or execute their action. For the government, they consider only the financial statements to be a company’s representative. But it fails to represent in most of the cases like the present situation of the internal management, labour union etc. Secondly, data can be mutilated which will ultimately reflect the wrong position of the company and turn out misleading for the government (Benjamin & Stanga, 1977).
Asset 2. Equity 3. Asset 4. Expense 5. Liability 6. Asset 7. Asset 8. Liability 9. Asset 10. Liability 11. Asset 12. Revenue 13. Equity 14. Expense 15. Expense 16. Liability
References
Beaver, W. H., 1966. Empirical Research in Accounting: Selected Studies. Journal of Accounting Research, Volume 4, pp. 71-111.
Benjamin, J. J. & Stanga, K. G., 1977. Difference in Disclosure Needs of Major Users of Financial Statements. Accounting and Business Research , 7(27), pp. 187-192.
Clausen, J., 2009. Accounting 101–Financial Statement Analysis in Accounting: Liquidity Ratio Analysis Balance Sheet Assets and Liabilities. Journal of Financial Statements, 12(1), pp. 56-64.
Richards, V. D. & Laughlin, E. J., 1980. A Cash Conversion Cycle Approach To Liquidity Analysis. Financial Management, 9(1), pp. 32-38.
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