Analysis of the Operation and Financial Condition of the Enterprise

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Analysis of the Operation and Financial Condition of the EnterpriseTable 4.5Company M: ratio analysis and interpretation of dataAverageindustryNotes Year 1 Year 2 Year 3 figureRates of return:Net profit / Net assets A 18,1% 11,7% 6,3% 20%Net profit / Amount of sales B 4,8% 3,2% 1,7% 6%Amount of sales / Net assets C 3,8 3,6 3,6 3.3 timesGross profit / Amount of sales D 20% 20% 20% 20%Liquidity ratios:Current E 4,2 2,6 1,8 2.5 timesQuick F 2,1 1 0,6 1.1 timesActivity ratios:Stock turnover G 8,7 5,4 3,5 6 timesAccounts receivable collection periodH 34 37 50 32 daysAccounts payable payment periodI 25 35 61 25 daysCapital ratios:Gearing J 6,6% 5,4% 4,7% 10%Total debts / Total assets K 22,8% 33,1% 48,2% 50%Table 4.6 Ratio calculationRatio Notes Year 1 Year 2 Year 3Net profit / Net assetsNet profit / Amount of salesAmount of sales / Net assetsGross profit / Amount of salesCurrentratioQuickratioStock turnoverAccounts receivable collectionperiodAccounts payable collectionperiodGearingTotal debts / Total assetsABCDEFGHIJK88
Analysis of the Operation and Financial Condition of the Enterprise1 Performance indicators1. Return is unstable: within 4 years no obvious trends have been established.2. Except for Year 2, the net profit margin remains as a two-digit figure, although inthe management of revenue and expense the values evidences difficulties in thecompany of maintaining the required gross profit margin. This can be explained bythe inability to raise the sales prices proportionate with the increases in the costs ofmaterials and/or labour.3. The feeling arises that the fixed costs are being well-controlled as their portionform the amount of sales decreases year by year. It would be useful to assess theirconsistency with the estimated values.4. Although the asset turnover is not very high it increases constantly. This is a goodsign as the company has invested further amounts of money in assets, especially inYear 4.2. Liquidity1. Working capital has been increasing annually parallel to the increase in the salesamount, although its value required for sustaining the return from one lat of saleshas decreased year by year. This can be seen from the relation between the workingcapital and the amount of sales.2. Current and quick ratios have fallen over the 4 year period. This evidences aninsignificant worsening of the company position in this matter. However, thisshould not cause any concern as the two ratios are still above the normalrequirement – 2: 1 for the current ratio and 1: 1 for the quick ratio.3. The situation with stock turnover has improved slightly over the last year, however,the current figure for the last 4 months is not yet satisfying.4. In order to be able to substantiate the accounts receivable collection theinformation on real events must be obtained (terms of repayment) in conformitywith which the company would issue credit, because there is a notion that thesituation with the debt collection has worsened in the last three years. If the agreedterms for giving the credit constitute a 30 day period the analysis shows that thecustomers extend them 4 times at least. In the result bad debts may occur if thispolicy is not reviewed on a regular basis.5. It seems that the creditors of the company are very patient, although it would beuseful again to clarify the terms of purchasing. The increase in the creditors’ debtsin Year 4 is not a very alarming indicator.6. Complete self-financing of investments in fixed assets is a good thing, as theadditional cash is mainly coming from the shareholders with the add-on of thedeductions for depreciation.Sources of assets and their use1. For the 3 preceding years the liquidity of the enterprise has considerably declinedand as a result the bank loan has been considerably increased.2. The basic reason of the decrease in liquidity was the requirement to increase theworking capital by more than Ls 1 mln within two years.89
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