Management Efficiency And Solvency Ratios Essay

Question:

Discuss About The Management Efficiency And Solvency Ratios?

Answer:

Introduction

Ratio analysis is the analysis of the financial statements of a company in order to evaluate the financial performance of the said organisation for a specified period. Ratio analysis helps in trend analysis where the performance of a company can be compared over a number of years and it also helps in comparison between different firms of different sizes. The ratios can be categorized into profitability, liquidity, asset management efficiency and solvency ratios (Berk & Demarzo, 2016)

Ratio Analysis of Veep Marketing

A ratio analysis was conducted for Veep Marketing for the financial year 2017 and the results have been discussed below.

Ratios

2017

Profitability

Return on Equity

15.1%

Profit margin

17.3%

Cash flow to sales

7.9%

Asset Efficiency

Asset Turnover

0.9 times

Days debtors

27.7 days

Liquidity

Current ratio

3.8

Cash flow ratio

2.2

Capital Structure

Debt to equity ratio

86.4%

Interest coverage ratio

14.9 times

Return on Equity

The return on equity measures the amount of profits that a company is able to generate from each dollar of investments made by the shareholders of the company. Here the return on equity is 15% which means the owner of Veep Marketing is able to ear 15% on the total capital contributed.

Profit margin

The profit margin is expressed as net income as a percentage of sales. It is the margin left after all expenses have been paid for. The company’s net profit margin is an impressive 17.3% which means the company is able to earn 17.3% of profits from sale revenue of $40,010

Asset Efficiency

This ratio is an indicator of how efficiently the company is using its assets to generate sales. The ratio means amount of sales generated for every dollar invested in assets in the year. A higher ratio is preferred as it means efficient asset management. Veep Marketing has an asset turnover ratio of 0.9 which means the company generates only 0.9 dollars for every 1 dollar invested.

Day’s debtor

This ratio measures the number of days it takes to convert accounts receivables into cash in the year. The days debtors for Veep Marketing is almost 28 days which means it takes the company 28 days to collect cash from its debtors.

This ratio measures the ability of the company to pay for its current obligations from the current assets. Veep Marketing has a current ratio of 3.8 which means the company has 3.8 times more current assets than current liabilities and hence can easily pay for the current liabilities from its current assets.

Cash flow ratio

This ratio indicates how well the current liabilities can be paid from the company’s available cash balance. The company has a ratio of 2.2 which means the cash balance is 2.2 times of the current liabilities of the company and the company can pay all of its current liabilities from the available cash.

Capital Structuro

It is the ratio of debt to equity in the company’s capital structure. The ratio of the company is 86% which means of the total funds invested, 84% is comprised by debt and the rest by equity. This shows the company is highly leveraged.

Interest coverage ratio

It is the ratio of profits available to pay for the interest expenses if the company. The ratio for Veep Marketing is 15 times which means from the operating profit, the company can pay for its expenses 15 times.

Limitations

The limitations relate to the limitations of the ratio analysis. The ratios have been calculated on the basis of the data in the financial statements for the year 2017. Balance sheet has historical data, hence any effect of inflation is not taken into consideration and hence ratios may give distorted results. The qualitative factors like employees are not considered. Any changes in the external environment which may impact the analysis is not considered (Peavler, 2017)

Conclusion

From the above analysis, we see that the company has a satisfactory profitability, liquidity and asset efficiency. The only area where the company seems to be at risk is the capital structure. The company has more debt than equity. This makes it risky. The company should look at reducing its debt and using more owners’ funds to finance its operations.

References

Berk, J., & Demarzo, P. (2016). Financial Management. Australia: Perason.

Peavler, R. (2017, February 28). Advantages and Disadvantages of Ratio Analysis for Business. Retrieved September 14, 2017, from The Balance:

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