Analysis
Current Ratio (CR)
A liquidity ratio called the current ratio assesses a company’s ability to settle its short-term debts, which are due within a year. It fully explains to investors and analysts how a business can utilize its current assets to settle its current liabilities and other payables. Generally, an appropriate current ratio is comparable to the industry norm or slightly higher (Kadim, Sunardi, & Husain, 2020). The likelihood of distress or default may increase with a CR that is lower than the industry average.
In a similar vein, if a company’s CR is significantly higher than that of its peer group, it suggests that management may not be utilizing its resources effectively. Because it includes all current assets and current liabilities, unlike some other liquidity ratios, the current ratio is specifically named as such. The working capital ratio is another name for it.
Long-Term Debt-to-Equity Ratio
A company’s reliance on long-term debt, such as loans, to fund its assets is reflected in its long-term debt-to-equity ratio. This ratio is found by dividing total long-term debt by total shareholder equity (Kadim, Sunardi, & Husain, 2020). Shareholders’ equity is the difference between the company’s total assets and its total liabilities. When evaluating a company’s financial health, it is essential to look beyond this single number, which is the result of subtracting total assets from total debt without considering the payment terms of the debt.
Gross Margin Ratio (GMR)
As a measure of a company’s financial performance, the gross margin ratio compares a company’s gross margin to its revenue. Profit is the amount left over after a company has deducted its cost of goods sold from its sales (Kadim, Sunardi, & Husain, 2020). The ratio represents the proportion of sales that the corporation retains, rather than allocating it to expenses.
Net Profit Margin
The net profit margin, also known as the profit margin or net profit margin ratio, is a financial metric that measures a company’s profitability in relation to its sales. It is a metric used to evaluate how much money a business earns after expenses, relative to the amount of money it receives from customers (Kadim, Sunardi, & Husain, 2020). Net profit (also known as net income) is stated as a proportion of total revenue and is the net profit margin.
Return on Equity (ROE)
Return on equity is a ratio of net income to shareholders’ equity used to evaluate a company’s profitability. ROE is the net asset return for a company, as equity equals total assets minus debt. A company’s profitability and its efficiency at making profits can be measured, at least in part, by its ROE (Kadim, Sunardi, & Husain, 2020). Profitability and expansion, as measured by ROE, are indicators of how well a company is managed.
Table 1 – Ratios for the Three Companies
Note: *Net income for the fiscal year is used to calculate ROE before common stock dividends but after preferred stock distributions.
**Preferred stock is not included in shareholders’ equity.
Discussion
The current ratio indicates the corporation’s ability to repay its short-term debts within a year. Investors can use CR to determine if their present assets will be enough to pay off their debt within a year. The CR is defined as short-term assets divided by short-term liabilities. Ideally, the ratio would be 2, but anything over 1 is also good. For example, the CR of Apex Inc. is greater than 1, whereas that of Ennis Inc. is less than 1, and that of Deluxe Corp. is above 2. According to the statistics, Ennis Inc. has the highest CR of any company in the market. It has a higher proportion of its revenue going toward paying down short-term debt than comparable enterprises.
Calculated by dividing total debt by shareholders’ equity, the debt equity ratio reveals the shareholders’ and owners’ ability to service long-term debt. Ratios around 2 or 2.5 are optimal. It states that for every dollar invested, 66 cents go into debt and 33 cents go toward shareholder equity. All the companies in the table above have debt levels that are below the optimal ratio. On the other hand, Vistaprint has a higher debt-equity ratio than its competitors. There are zero-to-one ratios in Ennis, and the apex is less than 1.
The gross margin ratio represents sales revenue. The formula for this metric is gross profit divided by net sales, indicating the daily percentage of income generated by a business. The higher the GMR, the greater the company’s revenue. In the eyes of investors, it is of great value. Apex Inc. has the highest ratio of any comparable company, which is very encouraging for the company’s future. Additionally, Apex Inc. has experienced growth from 2012 to 2013.
The ratio of a company’s net profit to its net sales provides a measure of its profitability. That ratio does a better job than any other at summarizing how well a company is performing financially. The more profitable a corporation is, the higher its net profit ratio. While Ennis Inc. has a greater ratio than the other two companies, Apex Inc. has shown substantial improvement between 2012 and 2013. Increased investment in the company is expected to produce positive returns.
The return on equity ratio measures the rate at which shareholders recoup their initial investment in equity in relation to the company’s net income. A ROE of 20% is considered optimal. Since Apex Inc.’s ROE is higher than that of its competitors, it serves as a more convincing signal to investors that they should invest in the company. The company had a significant increase in profits between 2012 and 2013.
Conclusion
Based on its CR for the past two years, Apex Printing appears to have enough liquid assets to cover its immediate debt obligations. Both the gross margin and net profit margin are lower than Deluxe’s, but still above average for the sector. Apex’s ROE is lower than Deluxe’s, showing that there is room for improvement to reward investors with greater returns. Apex has the largest long-term debt-to-equity ratio, indicating that the company relies more on debt financing than either of the other two. It is a good thing to do because debt financing offers benefits, including tax advantages.
Reference
Kadim, A., Sunardi, N., & Husain, T. (2020). The modeling firm’s value based on financial ratios, intellectual capital and dividend policy. Accounting, 6(5), 859-870. Web.