Financial Performance Analysis Case Study Example | Topics and Well Written Essays - 1500 words

Financial Performance Analysis - Case Study Example This shows a continuous decline in current ratio in 2006 onwards as compared to that in 2005, which shows that the company is experiencing liquidity crunch; and this may ultimately lead to insolvency of the company. The desired (benchmark) current ratio is 2:1. The current ration of M & S shows that the short term assets of the company are not sufficient to cover the short term liabilities. The Debt ratio of M&S was 4055.2/5210.5 = 78% in 2006 which is lower than 3958.1/4867.3 = 81% in 2005. In addition, the interim statements shows a slight increase in the debt to asset ratio to 4289.6/5410.8 = 79%. Overall, the ratio shows that almost 80% of the total assets of the company are financed through debt. When analyzed with current ratio, this shows that the company might be vulnerable to problems arising due to extra loans and debts, and inability to service debt due to lower levels of current assets. The Debt-Equity ratio of the company has shown a declining trend as it decreases from 3958.1/909.2 = 4.35 in 2005 to 4055.2/1155.3 = 3.51 in 2006. It shows an increase to 4289.6/1121.2 = 3.83 for the half yearly period in 2006. This relatively lower level of D/E ratio is considered to be safer and shows that the company is not heavily indebted. ... The ROA for the period April - September 2006 was 281.3/5410.8 = 5.2%. The decline shows that the company is not doing well in making an effective use of its assets to generate income for 2006 as compared to that in 2005. Total Assets Turnover The asset turnover for the company has been 7797.7/5210.5 = 1.50 in 2006 as compared to 7490.5/4867.3 = 1.54 in 2005 showing a declining trend. It was 3929.4/5410.8 = 0.726 for the half year period in September 2006. The total assets turnover is a critical ratio that measures the efficiency of the organization in using its assets to generate sales. The ratio for M&S is on the lower side showing that assets are not being used efficiently to generate dollar of sales. Management should take a note of this and should take appropriate steps to resolve this issue. Inventory Turnover The inventory turnover (Cost of Sales/Inventory) for the company has been 4812.1/374.3 = 12.86 in 2006 as compared to 4887.6/338.9 = 14.42 in 2005. This shows that on average, inventory has been sold 12.86 times in 2006 as compared to 14.42 times in 2005. The decline might be due to the ineffective inventory management practices, or may also be due to the lack of sales (but the sales have increased in 2006 as compared to 2005). The company should investigate this decline in inventory turnover to appropriately identify and resolve issues. Cost of Goods Sold to Sales & Gross Profit Margin The company did relatively better in reducing the cost of goods sold to sales ratio at 4812.6/7797.7 = 61.72% in 2006 as compared to 4887.6/7490.5 = 65.25% in 2005. This shows that the cost of inputs have been kept to low as compared to the revenue that is being generated from these inputs. This may show efficiencies in production function and indicates that there