Company X’s Financial Profile and Analysis

Short-Term Ratios

The analysis of short-term ratios (Table 1) shows that the company can settle its short-term liabilities using the current assets and quick assets, but not in utilizing cash and its equivalents. Although the current ratio fluctuates, it increased from 1.5 times in 2015 to 2.49 times in 2018 due to the increasing amount of assets. The trend of quick ratio exhibits an increasing trend similar to that of the current ratio because it increased from 1.55 times in 2015 to 2.42 times in 2018, owing to the high proportion of quick assets. The quick ratio that is greater than one implies that quick assets, such as cash, marketable securities, and accounts receivables are adequate to settle current liabilities (Goel, 2015). Further analysis of the liquidity of the company indicates that the cash ratio increased from 0.62 in 2015 to 0.74 in 2018 because of the growth in cash and marketable securities.

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Table 1. Short-Term Financial Ratios.

2015 2016 2017 2018
Current ratio 1.59 times 1.81 times 1.61 times 2.49 times
Quick ratio 1.55 times 1.78 times 1.58 times 2.42 times
Cash ratio 0.62 times 0.81 times 0.70 times 0.74 times

Long-Term Ratios

The analysis of long-term ratios (Table 2) shows that the company can meet its liabilities over a considerable long period. Since the total debt ratio decreased from 0.43 times in 2005 to 0.37 times in 2018, it means that the company has a manageable level of debt. Companies with low debt ratios are stable in financing their operations (Bragg, 2018). The total debt ratio of 0.37 times implies that shareholders own the majority of assets (63%), while the creditors own the minority of assets (37%). The long-term debt ratio of the company is relatively stagnant because it was 0.22 times and 0.23 times in 2015 and 2018, respectively, with declines to 0.19 times in 2016 and 0.12 times in 2017. The low level of the long-term ratio indicates that the company can liquidate about 23% of its total assets to reimburse the long-term debt. The analysis of times interest earned (TIE) shows that it remained relatively constant with time because it increased from 9.20 times in 2015 to 10.94 times and 10.44 times in 2016 and 2017, correspondingly, and then declined to 8.49 times in 2018. TIE reveals that the company is stable and less at risk for bankruptcy because it can meet its financial obligations more than eight times. The cash coverage ratio of the company increased from 8.32 times in 2015 to 9.23 times in 2018 with increments to 11.76 times and 11.17 times in 2016 and 2017, respectively, due to an increase in cash and its equivalents.

Table 2. Long-Term Ratios.

2015 2016 2017 2018
Total debt ratio 0.43 times 0.37 times 0.36 times 0.37 times
Long term debt ratio 0.22 times 0.19 times 0.12 times 0.23 times
Times interest earned 9.20 times 10.94 times 10.44 times 8.49 times
Cash coverage ratio 8.32 times 11.76 times 11.17 times 9.23 times

Asset Management Ratios

The analysis of the asset management ratios (Table 3) reveals that the company is less effective and efficient in generating sales from its assets. High turnover rates on assets and short days in the collection of sales indicate effective and efficient management of assets (Brigham & Ehrhardt, 2017). The inventory turnover ratio shows that sales increased by 7.22, 16.3, 12.29, and 7.79 times the average inventory in 2015 through 2018, in that order. The analysis of day sales inventory exhibits a decreasing trend from 50 days in 2015 to 46 days in 2018 with significantly lower days of 22 and 29 in 2016 and 2017, correspondingly. The receivable turnover increased from 0.92 in 2015 to 1.23 in 2018, which means that the company can collect 23% of its receivables in a year. The declining trend of day sales in receivables to 296 days in 2018 from 396 days in 2015 shows that the company is increasingly becoming efficient in collecting cash from its customers. The improvement in fixed asset turnover from 0.22 times in 2015 to 0.28 times in 2018 means that the company is less efficient in generating net sales from its fixed assets. The analysis of total asset turnover indicates an increasing trend from 0.12 times in 2015 to 0.16 times in 2016, which shows that the company is less efficient in generating sales from the average total assets.

Table 3. Asset Management Ratios.

2015 2016 2017 2018
Inventory turnover ratio 7.22 times 16.3 times 12.29 times 7.79 times
Day sales inventory 50 days 22 days 29 days 46 days
Receivable turnover 0.92 times 1.37 times 1.25 times 1.23 times
Day sales in receivable 396 days 266 days 292 days 296 days
Fixed Asset turnover 0.22 times 0.30 times 0.30 times 0.28 times
Total Asset turnover 0.12 times 0.17 times 0.16 times 0.16 times

Profitability Ratios

The analysis of profitability ratios (Table 4) indicates that the company exhibits a decreasing trend in profits. Since the profit margin decreased from 55% in 2015 to 29% in 2018, it shows that the net income level of the company is decreasing rapidly with time. The decline in return on assets from 7% in 2015 to 4.8% in 2018 suggests that the company’s assets are not efficient and effective in generating net income. Moreover, the decrease in return on equity from 12.6% in 2015 to 7.6% in 2018 implies that the company generates small profits for investors.

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Table 4. Profitability Ratios.

2015 2016 2017 2018
Profit Margin 55% 44% 32% 29%
Return on assets 7% 7.7% 5.5% 4.8%
Return on equity 12.6% 12.4% 8.6% 7.6%

Market Ratios

According to the analysis of market ratios (Table 5), the company is not profitable to shareholders. Earnings per share declined from 0.323Dhs in 2015 to 0.236Dhs in 2018. Additionally, the price-earnings ratio decreased slightly from 7.18 times in 2015 to 6.52 times in 2018, which means that the company has a declining market performance.

Table 5. Market Ratio.

2015 2016 2017 2018
Earnings per share 0.323 dhs 0.354 dhs 0.254 0.236
Price-earnings ratio 7.18 times 7.42 times 8.66 times 6.52 times

Conclusion

The analysis of short-term and long-term financial ratios depicts that the company exhibits positive performance in liquidity and low debt burden. However, the analysis of asset management ratios indicates that the company is not efficient in turning over its assets because it has long days in sales inventory and receivables and low turnover rates in receivables, fixed assets, and total assets. Additionally, since the company has low and decreasing profitability ratios, investors should not buy its shares because they are not worthy of investment. The decreasing earnings per share and price-earnings ratio suggest that the company performs poorly in the market, and hence, it is not lucrative to invest in it.

References

Bragg, S. M. (2018). The interpretation of financial statements (2nd ed.). Centennial, CO: AccountingTools.

Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory and practice. Boston, MA: Cengage Learning.

Goel, S. (2015). Financial ratios. New York, NY: Business Expert Press.

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