Introduction
Originally, financial statement analysis is the research, which requires thorough and multi angle approach towards estimation of the financial ratios and financial flows, both horizontal and vertical. The aim of this paper is to analyze the financial ratios of Rondo Company by doing the financial ratios and also comparing it to the industry averages given in the case. The analysis will be completed in two parts – the financial part (math) and recommendation part in memo format.
Financial Ratios and Analyses
First, the analysis of accounts should be provided. The information on the matters of the accounts, provided in the case study is the following.
Taking into consideration the matters of the fixed denominator, it should be emphasized that it is closely associated with the matters of the incomes and expenses. The accounts of Rondo Company should be analyzed in the context of the Total Asset Turnover, which is 1.10.
- The dividend payout ratio should be between 40% and 50%.
- The debt to total assets ratio should not be higher than 50%. Moreover, the Board’s intention is to maintain total debt, including current liabilities, at 55% of assets or lower.
- Annual company growth should continue in the 5% to 10% range. The board will measure growth in the annual increase in Earnings Per Share.
- The company has investigated several sources of funding for the new project and for future needs.
In accordance with these facts the horizontal analysis of the company will be he following:
The vertical analysis, which is the analysis of net sales in the context of total assets points out that the appropriate percentage of 8,3% is the satisfying result, nevertheless, the company should refrain from large-scale investment at this stage of its development.
In comparison with Metal Pipe Inc. Rondos ratios look rather attractive, nevertheless, MPI has more stable financial trends
Analytical Memo
As for the financial analysis of the regarded opportunities, there is strong necessity to emphasize that the projected deal, associated with the investment, may be regarded as a potentially successful decision for the further growth of the company. Nevertheless, the analysis of the financial assets and the incomes of the company revealed the fact that the company is not ready for such large-scale investment. In spite of the fact that the financial assets and the overall financial flow analysis have revealed the incredible stability of the company, this investment may violate its stability, and cause essential losses, especially taking into consideration the marketing trends of the Poly Company.
The Initial Capital Expenditure for equipment, which is negotiated for the agreement is $6.25 million. Originally, all the expenses may be compensated by the mortgage rates. Originally, the Total Amount Offered with Poly Pipe Purchase is $13 million. The interest rates of the bank, in the case of the loan taking are 11.50%. Originally, this rate is high enough for the company, especially taking into consideration the amount of the required loan.
As for the matters of Industry analysis, it should be stated that the world trends of copper, steel, and iron pipe industry tend to grow, and the incomes will be increasing. Surely, the proper financial management of the company will assist in increasing the sales and incomes, thus increasing the credibility of favorable conditions for the investment, nevertheless, essential difficulties may be experienced in the case of managerial fault. Moreover, the poly pipe production tends to stay on the same level, and there is no necessity to look for the increase of the net income from this industry.
The recommendations, that should be given to both companies is to postpone the investment and negotiate on the matters of cooperation and financial assistance from the side of Rondo Company. The fact is that, loan will not violate the stability of Rondo Company, if it is smaller than the investment requirement, on the other hand, it would provide the necessary financial assistance for the Poly Company, thus, allowing it to expand its manufacturing capacities and penetrate the wider market segment.
Conclusion
In conclusion, it should be emphasized that the main idea of the research was to conclude whether the financial ratios of Rondo Company are stable and reliable enough to conclude the investment agreement with Poly Company, which is aimed at increasing its industrial capacity in the sphere of poly pipes. The research has revealed that the best solution will be not to conclude this agreement, as investment may violate the financial stability of Rondo Company.
Bibliography
Brigham, E.F., & Daves, P.R. Intermediate Financial Management. South-Western College Pub, 2009.
Liaw, Thomas K. The Business of Investment Banking. New York: John Wiley & Sons, 2009.