Performance Analysis And Valuation Of Company X

Balance Sheet(s)

The detailed ratio as well as performance analysis of the company has been provided below:

Ratios	2017	2016	2015 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2014	2013
Liquidity Ratios:
Current ratio	1.07	1.00	1.06	1.06	1.05
Quick ratio	0.85	0.63	0.83	0.61	0.62
Accounts Receivable to Working capital	3.18	3.49	4.08	4.10	4.28
Inventory to Working Capital	0.30	0.32	0.38	0.35	0.38
Sales to Working capital	20.70	20.89	-1.64	1.54	29.97
Long-Term Liabilities to Working Capital	9.54	10.76	12.82	11.29	12.29
Activity ratios:
Accounts Receivable Turnover	6.50	5.98	6.03	7.20	7.00
Days Sales in Receivables	56.14	61.06	60.52	50.73	52.11
Inventory Turnover	32.21	33.03	37.24	52.26	48.39
Days Cost of Sales in Inventory	11.33	11.05	9.80	6.98	7.54
Operating Cycle Days	67.47	72.11	70.32	57.71	59.66
Sales to Assets	0.71	0.65	0.66	0.82	0.76
Sales to Net Fixed Assets	2.19	2.01	2.03	2.54	2.35
Profitability ratios:
Percent Gross Profit	53.00	49.00	43.00	38.00	38.00
Percent Profit Margin on Sales	6.03	6.50	3.03	-2.05	-8.60
Percent Rate of Return on Assets	4.27	4.23	1.99	-1.68	-6.57
Price Earning Ratio	0.16	0.16	0.16	0.19	0.19
Earnings Per Share	23.96	24.06	23.92	20.24	20.09
Coverage ratios
Debt To Total Assets	0.79	0.80	0.81	0.78	0.78
Percent Owners’ Equity	21.34	20.15	19.02	21.73	21.85
Equity Multiplier	4.69	4.96	5.26	4.60	4.58
Debt to Equity	3.69	3.96	4.26	3.60	3.58
Book Value Per Share	6.50	6.07	5.62	5.62	5.62

Each of these ratios have been carefully analysed in details below and the most important ones have been graphically explained.

1. Liquidity Ratios:

• Current Ratio: The current ratio is one of the most important liquidity ratios of any organisation. This ratio reflects the financial strength of any company (Delen, Kuzey and Uyar 2013). It says the number of times the current assets exceeds the current liabilities of the company. A higher number is needed in this case, as it reflects a company’s power to pay off its short term obligations.

In Company’s X current ratio, over the five year period, it has remained relatively 1.0, thus it states that the company has remained healthy in this front and has been able to meet its short term obligations. The five year period’s current ratio has been graphically showed below (Fig 1), where it shows that the average has remained very healthy.

 

(Fig 1)

• Quick ratio:This ratio is also called the acid test ratio and it helps to understand the number of times the liquid assets of the company are able to cover the short term obligations of the company.

In case of Company X, it can be seen that the quick ratio of the company has improved over the years, and it currently stands at 0.85, which shows that the ability to honour short term obligations is good.

• Inventory to Working Capital:This ratio measures the overdependence of the working capital of the company on the stock of inventory (Lartey, Antwi and Boadi, 2013). It is better that this ratio remains low as it states that the company has a decent level of working capital and the fact that it is not dependent on the level of inventory of the company. The figure of the ratio is stated below:

 

(Fig 2)

It can be seen that Company X’s quick ratio is not healthy as it has considerably increased over the years and it states that it is overly dependent on the inventory of the company.

• Sales to working capital:This ratio shows the company’s ability to finance all its operations which are presently undertaken by it. This ratio aims to show the proper utilization of working capital towards the sales of the company. However, a very lower level could indicate absence of adequate level of sale.

Company X’s sales to working capital ratio has been low. Since 2013, this has been on a decreasing trend. It has reduced from 30 in 2013 to almost 20 in 2017. In 2015, it was really low, but overall, the utilisation of working capital has been properly done as indicated by moderately low levels of sales to working capital ratio as seen in the fig 3.

 

(Fig 3)

1. Activity ratios:

• Accounts receivable turnover ratio: This ratio measures the time or precisely measures the number of times the receivable or the money to be received comes to the company. It also helps to indicate the company’s ability to receive its outstanding and leftover receivables from its customers and clients. In this ratio, a higher ratio is favoured because it indicates that the time between sales and the collection of cash is very short in nature.

Company X’s accounts receivable turnover ratio has been fluctuating over the years. Since 2013, it has fluctuated each year and has not been constant. In 2013, it was a round 7 and now in 2017 it is at 6.50 and it had stooped its lowest in 2016 when it had touched 5.98. This reflects a poor show from company X in this frontier.

• Day’s sales in receivables: This ratio is used to measure the number of days a company’s receivables in terms of sales remain outstanding and are left to be received. An increase in the number of days, indicate late payments from client’s side. The companies aim should be reduce the number of days it takes to get the money back from the client. Generally it should not exceed 10 to 15 days.

In case of Company X, the number of days taken up by the clients to return the money is about 56. This is a serious issue as it is putting significant pressure on the cash flow of the company. It has remained in the place of 50s for the past 5 years, sometimes exceeding 60 days. The company should take adequate steps to address this issue at the earliest. This can be viewed in figure 4 given below.

 

(Fig 4)

• Inventory turnover:This ratio helps in measuring the support of working capital upon the inventory or the stock of the company. In the case of inventory turnover, a lower figure is suited, indicating that a decent level of working capital is required.

This has also been very low in case of company X, indicating that a decent level of dependency between working capital and inventory.

• Operating cycle ratio:This ratio indicates the total conversion period for the company. It is the average number of days it takes to convert inventory or stock to turn into cash and return back to the company. This ratio helps in understanding the line of credit and the credit worthiness of the suppliers and external parties and clients.

In case of operating cycle ratio of Company X over the period of five years is 65 on an average. The company must try to bring it to a very low level and decrease it as seen in figure 5. If the money gets stuck in the assets or in the hands of the clients, then it is a big loss for the company.

 

(Fig 5)

• Sales to Net fixed assets:The effectiveness of a company to properly utilize its fixed assets to generate sales. The more, the better. As a higher figure indicates that the company judiciously uses its fixed assets in order to create and increase more sales.

The company X in this scenario, has some serious issues to address as the company’s sales to net fixed assets. It is very low. The figures currently stand at 2 in 2017. A drastic change is necessary as can be seen in the figure 6 given below:

Income Statement(s)

 

(Fig 6)

1. Profitability ratio:

• Percent gross profit: This ratio indicates the gross profit earned upon the amount of sales and it also states the amount of sales is available to cover the operating expenses and the profit contribution.

The percent gross profit ratio of the company X is in a satisfactory position and currently at 2017, it stands at 50. It has followed the same trend in the past five years and this indicates a strong and positive health of the company.

 

(Fig 7)

• Percent rate of return on Assets:This ratio indicates how effectively the company’s assets are being used to generate profits of the company. It is one of the most significant ratios, which helps in determining the success of the company.

Company X’s percent rate of return on assets is also very healthy and has remained in the safe level. It currently stands at 4.27, which is well within the industry standards. It is shown in figure 8 below:

 

(Fig 8)

• Percent profit margins on sales:This ratio helps in indicating the amount of profit earned by the company and how tactfully a company could deal with higher costs or a scenario of low sales in the future.

Company X’s percent profit margins on sales is well within the satisfactory level of 6.03 as shown in figure 9 This indicates that the company is well prepared to adapt itself to the changing scenarios of low sales or profits in the future.

 

(Fig 9)

1. Coverage Ratios:

• Debt to total assets: This ratio shows what amount of debt the company presently carries in proportion to its asset holdings ( Grant 2016). A company‘s greater debt to total assets ratio indicates that the company has more debts than its assets, therefore the creditors indicate a lower ratio in this case.

In the case of company X, the debt to total assets remains very low and has remained very low throughout the period of five years. The average figure being 0.79 s is evident from the figure given below:

 

(Fig 10)

• Debt to equity:This ratio measures the financial leverage of the company by stating what amount of debt and equity the company is using in its capital structure (Delen, 2013). A lower ratio indicates a lower amount of risk involved in the capital structure of the company.

In this company, the debt to equity ratio is low which is beneficial and risk free for the company. It stands at 3.69 as of 2017 which is a decent level, accepted by the industry standards as shown in the given figure:

 

(Fig 11)

Par value for the 3 years:

2015= $190,000/50,000=3.8, 2016= $190,000/50,000=3.8, 2017=$ 190,000/50,000=3.8

Calculation of market values for the three year period:

For 2015, 2016 and 2017:

Net income (A)	$20,206 (2015)	$44,661 (2016)	$45,550 (2017)
Less: Dividend paid (B)	$0.40	$0.44	$0.48
Outstanding shares (C)	$190,000	$190,000	$190,000
Market value (D)	0.11	0.23	0.24

The differences between par and market value for the three year period:

Year	2017	2016	2015
Par value	3.8	3.8	3.8
Market value	.24	.23	.11
Difference	3.56	3.57	6.69

On careful analysis, differences have been pointed out between the market and par value for the three years, there are large differences between the two, it can be caused due to various reasons such as market volatility, changes in the stock prices due to market factors, changes in government rules and regulations and other external factors (Frost et al., 2014).

Company Y’s 5 year performance:

Key Ratios	Company Y
	2017	2016	2015	2014	2013
Debt ratio	0.5	0.52	0.53	0.53	0.54
Current ratio	2.36	2.31	2.25	2.45	2.42
EPS	1.52	1.45	1.36	1.87	1.45
ROE	20.48	20.54	21.23	23.14	20.16

Company X’s 5 year performance:

Key Ratios		Industry
	2017	2016	2015	2014	2013
Debt ratio	0.58	0.59	0.57	0.58	0.56
Current ratio	1.89	1.74	1.65	1.78	1.74
EPS	0.9	0.92	0.91	0.9	0.91
ROE	18.56	18.25	18.01	17.98	18.11

Industry‘s 5 year performance:

Key Ratios		Company X
	2017	2016	2015	2014	2013
Debt ratio	0.78	0.8	0.81	0.78	0.78
Current ratio	1.07	1	1.06	1.06	1.05
EPS	0.91	0.89	0.41	-0.3	-1.18
ROE	0.14	0.14	0.07	0.054	0.21

Salient points of comparison:

• The company X in terms of debt ratio has shown a dismal performance as the debt ratio is significantly higher than both company Y and the industry performance. A higher debt ratio indicates more risk involved in the financial structure of the company (Petruzzo et al.,2015). If it remains higher, the company would be in a serious crisis. The management must take steps to address this issue.
• In terms of current ratio too, company X has not performed well, when compared with industry or company Y’s performance. Although, the company has maintained a decent record by keeping it at for the five year period, but when compared with the performance of the industry or especially with company Y, then company X has underperformed. Company Y has consistently maintained the level of keeping it till in the five year period. This tells us that the company X has not been able to honour the short term obligations of the various financial years in the five year period.
• Earnings per share is one of the sections, where company X has been quiet successful, when compared with the overall industry standards. It has consistently maintained its EPS at 0.9 in accordance with the industry standards. Nevertheless, when it comes to company Y, it still lags behind as company Y has maintained it well over 1.5, consistently over the five year period.
• Return on investment is one of the most important indicators of any company’s financial performance. It indicates, if at all the investment made, has yielded any kind of significant amount of returns to the company (Heikal, Khaddafi and Ummah, 2014). In this regard the company has performed very poorly in the course of the five year period and is not at all within the standards set up by company Y or the industry. The company’s management along with the board must refocus its aim and look for possible reasons for this under performance.

References:

Boudoukh, J., Feldman, R., Kogan, S. and Richardson, M., 2013. Which news moves stock prices? a textual analysis (No. w18725). National Bureau of Economic Research.

Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.

Do?an, M., 2013. Does firm size affect the firm profitability? Evidence from Turkey. Research Journal of Finance and Accounting, 4(4), pp.53-59.

Frost, J.J., Sonfield, A., Zolna, M.R. and Finer, L.B., 2014. Return on investment: a fuller assessment of the benefits and cost savings of the US publicly funded family planning program. The Milbank Quarterly, 92(4), pp.696-749.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia Stock Exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

Lartey, V.C., Antwi, S. and Boadi, E.K., 2013. The relationship between liquidity and profitability of listed banks in Ghana. International Journal of Business and Social Science, 4(3).

Petruzzo, P., Gazarian, A., Kanitakis, J., Parmentier, H., Guigal, V., Guillot, M., Vial, C., Dubernard, J.M., Morelon, E. and Badet, L., 2015. Outcomes after bilateral hand allotransplantation: a risk/benefit ratio analysis. Annals of surgery, 261(1), pp.213-220.