These ratios are based on the results of August 2018. These series of ratio are analysis to measure Kong Food’s profitability, liquidity, efficiency and solvency.
Financial ratios are the most common used method for analyzing and reviewing of financial statements. For proper conclusions to be made on the profitability, liquidity, efficiency and solvency of Kong Food’s various financial statements in the business have to be reviewed.
The analysis of financial ratio involves comparison of information in the business financial statement. It also entails analysis of the financial ratio to establish concrete reasons for the current financial position of the business and its financial performance. This ,in the long run, develops the business future expectations,Daher and Le Saout, (2015)
The ratios obtained after financial analysis can be used to compare performance between two financial periods of Kong Foods Company or Compare performance of Kong Foods Company and the industry as a whole.
Profitability ratios are one of the methods which used to measure and evaluate the company’s financial situation. According to Lekhanya (2013), Profitability refers to an attempt to assess a business’s ability to generate more earnings as compared to the incurred expenses from an operation.
Profitability ratio shows the company’s ability to use its assets to create profits and shareholder value. Profit margins measure each dollar of return for each dollar of sales. Higher margin reflects your business better profits from your sales.
Profit Margin = Total Comprehensive income/ Net Sales
=($7923.85-$13428.86)/$13660.45
=-$0.40
The restaurant’s average profit margin is 5% which means the restaurant get $0.05 as return by each dollar sale. For our restaurant’s profit margin is $0.40, which is equivalent to a loss of $0.40 per sales. This is not a good development.
4.2 Liquidity Ratio
The liquidity ratio is a type of financial indicator used to determine the business’s ability to repay short-term debt by comparing the current assets and current liabilities, Goddard and Onali (2012). The most basic way of determining the liquidity of a company, that is, its ability to pay short termed debts is through evaluation of its working capital. Working capital is given as a ratio between its current assets and current liabilities as below.
Current Ration = Current Assets / Current Liabilities
=$1587069.62 / $7855.52
=$202.03
Based on the above calculations, for every $1 short-term debt the business owing, we have $202.03 for current resource to pay for the debt. Some industries are normally more cash intensive than others and thus will be required to have a higher liquidity ratio than others. Thus liquidity ratio between companies can only be compared if they are of the same industry or do the same nature of operations.
According to our research, the corporate turnover ratio of related industries is 1.24 on June 30, 2018. Compare this ratio to our current ratio; our current ratio is almost 162.92 times the average. This is enough to prove that we can repay the debt.
4.3 Efficiency Ratio
Efficiency ratios are often used to analyze how many times the business sells its average inventory in one year. Generally the inventory turnover and account receivable turnover ratio are used to measure efficiency.
Inventory Turnover = Cost of goods sold / Average inventory
= $5736.60 / (0+$172.50)/2
= 16.63
Through the above calculations, this ratio data means that our company’s inventory is sold 16.63 (16.6) times a year. The average inventory turnover rate of Hengye is 5.44 in 2018. This means that our inventory turnover rate is very high.
4.4 Solvency Ratio
The solvency ratio is a key indicator to measure the company’s long-term financial situation. It is used by investors or any interested party in the business to show the business’ ability to repay debt and remain solvent. The lower the company’s solvency ratio, the greater the likelihood of default of debt. Green (2013).
The debt asset ratio can be used to show Kong Food Company’s Solvency Ratio. This ratio normally states the amount of company’s assets that are financed via debt financing and is expressed by the formula below.
Debt Assets Ratio= Total Liabilities / Total Assets
= $4744813.17 / $4762668.69
= $0.996 or 9.96% (KINDLY NOTE THAT IT IS 99.6% NOT 9.96%)
The data calculated from the above shows the percentage of our business that has debt financing. For every $1 asset we own, we owe $0.996. The industry’s average debt-to-asset ratio is 62%. Our debt-to-asset ratio is extremely low, and this data proves that our business is too dependent on our business assets and owner’s equity rather than seeking long-term debt to seek funding.
Conclusion
From the illustration and explanations given above, the following recommendations and conclusions can be made about Kong Food Company.
Kong Food Company is incurring losses instead of making profits. It has incurred more expenses than the income it has actually generated which has led to negative income generated. I would recommend that they try and increase the sales made which in turn will boost the revenue as a whole. Kong Food Company can also reduce the variable expenses the business incurs because it directly affects the revenue generated.
The Liquidity ratio of Kong Food Company shows that the company is in a position to pay its short term debts as and when they arise as the total value of current assets is more than the total values of current debts the company owes its creditors. Kong food Company is thus termed as being liquid even in the industry it operates in as its ratio is far much above the ratio the industry operates with.
Kong Food Company Inventory turnover is really high. Inventory turnover shows how fast Kong Food Company sells its inventory at hand or how frequent it restocks its inventory. In a year Kong Food Company inventory turns over 16 times a year and is on hand for approximately 21 days (365/16.6).
The high inventory turnover can be explained in two ways. It is either the Company makes good sales as it easily disposes its inventory at hand. On the other hand as compared to the average inventory turnover of 5.4 it can be concluded that Kong Food Company does not stock enough inventory. It can be recommended that they check on the amounts of inventory they order as well as the sales they make putting in mind the number of days they take to replenish the stock so that they don’t miss on any sale.
Kong food Company Solvency ratio as indicated by the debt to asset ratio is high. This means that 99.6% of the assets of Kong Food Company is financed through debts or by creditors and only 0.4% financed via Equity. This can be concluded that Kong Food Company is at a highly leveraged) that is depends so much on debt financing and thus is at high risk of insolvency, Rambe and Putry (2017). Kong Food Company should thus review its debt financing and bring it down to the industries acceptable level of 62% or low to reduce the risk exposure.
References
Daher, L. and Le Saout, E. (2015). The Determinants of the Financial Performance of Microfinance Institutions: Impact of the Global Financial Crisis. Strategic Change, 24(2), pp.131-148.
Goddard, J. and Onali, E. (2012). Self-affinity in financial asset returns. International Review of Financial Analysis, 24, pp.1-11.
Green, J. (2013). Financial Statement Analysis and Equity Valuation. SSRN Electronic Journal.
Lekhanya, L. (2013). Functions and Reliability of International Financial Reporting Systems of Rural Smes in Kwazulu Natal: Knowledge and Understanding of Financial Management. International Journal of Academic Research in Accounting, Finance and Management Sciences, 3(3).
Manisha B, R. (2012). Financial Performance Analysis. Global Journal For Research Analysis, 3(5), pp.9-10.
Rambe, M. and Putry, Y. (2017). The Influence of Return on Assets, Return on Equity, Current Ratio, Firm Size and Assets Structure on Capital Structure of Mining Companies That are Registered in Indonesia Stock Exchange. The International Journal of Social Sciences and Humanities Invention, 4(9).
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