Good Case Study About Current Ratio=current Assets/Current Liabilities
International Trade Finance
Section 1: Introduction
The main aim of designing the report is to provide an in-depth analysis into Seward Inc financial performance. A firm can strengthen its financial position when it has a better understanding of its financial position. The position is further understood through comparative analysis where the various financial ratios are compared to other competitors or the general performance within the industry. The report consists of various sections that look into the business performance through profitability leverage and efficiency, the comparative analysis and finally the ratio analysis.
Section 2: Firms performance analysis
The basic tool most investors or even the managers use to measure the overall performance is the profitability ratios. Operating profit margin the return on equity and return on assets are all profitability ratios used to measure the company’s performance. From the financial ratios, Seward Inc recorded a profit margin of 11%.This shows that the firm is making $0.11 for every dollar of sales before interest and taxes. The operating return on assets ratio of 15% further indicates a good performance in terms of converting investment into profit. Return on equity gives a measure of the amount of profit the firm can make for each dollar the investor or the shareholder puts into it. The ratio of 0.15 shows that Seward is generating 15% of the profit for every dollar invested. The fixed asset turnover ratio of 3.5 indicates that the business is efficient enough and has the ability to fully use its liabilities and assets internally. In terms of liquidity, the current ratio of 2.5 shows that Seward can settle off its current liabilities with its current assets. In addition, the firm can meet its short-term obligations as indicated by an acid test ratio of 1.3.Seward Inc has a debt ratio of 0.33 or 33% that gives them a good leverage and the ability to fulfill its financial obligation effectively.
Section 3: Comparative analysis
Liquidity defines the ability of a company to meet its financial obligations. The common liquidity ratios include the current ratio and the acid test ratio. Based on Seward financial statements, the current ratio, and acid test ratio were at 2.5 and 1.3 respectively meaning the company is in sound financial position to meet its short-term debt. These ratios though are lower when compared to the overall industry average that indicates a current ratio of 3 and an acid ratio of 1.5.This aspect mean that the rate in which the overall industry meets its financial obligation is higher than Seward Inc.
Seward Inc managers are generating attractive profit on the firm’s assets according to the given ratios. The firms operating return on assets ratio of 15% signifies that Seward has a good capability of converting its assets and investments into considerable profit. An operating margin ratio of 11% further indicates that the firm makes $0.11 for every dollar of sales made on the assets and products. This ratio is higher, considering the overall industry only makes a sale of $0.08 for every dollar of sales made.
The balance sheet assets such as accounts receivables and the inventories are the major ways in which Seward Inc finance its assets. The assets are particularly used to borrow money or acquire a certain amount of loan. Seward Inc then provides the security interest to the lending party. The amount of days it generally takes by the industry is less at 40 days compared to Seward’s 48 days.
The actual amount of the net income that has been returned to the firm as a percentage of the shareholders equity should be the major factor in determining whether Seward’s managers are generating a considerably good return on equity. A 15% ratio in return on equity indicates that for every $1 of shareholder's equity, the managers of Seward’s Inc generate $0.15 of profit. This is a considerably good ratio as compared to the $0.11 or 11% profit generated by the industry.
Section 4: Appendix A (Ratio analysis)
The current ratio enables analyst and investors to examine the liquidity of a company and whether it has the ability to pay off short-term liabilities with its short-term assets.
According to Seward current asset=$2000 while current liabilities=$800, for this reason
This means that Seward has the ability to pay off its current liabilities with its current assets effectively.
Acid-test ratio=Cash available + Accounts receivable+ STI/current L
= (500 +600)/800=1100/800=1.3.
The ratios are particularly good as it indicates Seward’s high ability to meet its short-term obligations
Days in receivables=Account receivables/ (Annual Net sales/365) =600/ (4500/365)=600/12.33=48.66
Seward Inc has only 48 days to recover the amount of receivables. This is high considering the overall industry ratio is at 40 days.
Days in inventories=Ending inventory/ (Cost of goods sales/365) =900/ (2800/365) =900/=117
Operating returns on assets=EBIT/Total Assets=500/3300=0.151=15.1%
This ratio indicates a good performance in terms of the firm’s ability to convert its existing investment into profit.
Operating profit margin=operating income/net sales =500/4500=0.11
Seward’s Inc generates $0.11 for every dollar of sales before interest
Total asset turnover =Net sales/total assets=4500/3300=1.36
Fixed asset turnover=sales/Net F .A=4500/1300=3.46
Debt ratio=total debt/total assets=1200/3300=0.36
Times interest earned=EBIT/Interest Expenses=500/60=8.3
Return on equity=Net income/Shareholders equity=315/2100=0.15
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