Financial Performance Analysis: Sparklin Automotive Company
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Write a memo to your superior analyzing the performance of Sparklin Automotive Company for 2010 and 2011. This analysis should be based on the information found in the consolidated financial statements. Your memo should include the following financial ratios and a comparison of the ratios over the two-year period:
- current ratio
- debt-to-equity ratio
- inventory turnover (use ending inventory)
- accounts receivable turnover (use ending accounts receivable balance)
- gross margin percentage
Show your calculations for each ratio and comment on SAC's performance for each ratio. Discuss other tools/methods that could be utilized to analyze the financial performance of a company.
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Solution Summary
The solution discusses the financial performance analysis regarding the Sparklin Automotive Company.
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Please see attached documents for memo and financial ratio calculations.
SAC ANALYSIS OF PERFORMANCE USING FINANCIAL RATIO ANALYSIS
Ratios: Formula 2010 2011
Current Ratio Current Assets/current liabilities 1.47551 1.403125
Debt to equity ratio Total debt/total equity 0.449634 0.440934
Inventory turnover Sales/Average inventory 6.111987 4.620462
Accounts receivable turnover Sales/Accounts receivable 18.23529 18.16216
Gross profit margin ratio ( Revenues - CGS) /Sales 0.491935 0.407024
DISCUSSIONS:
Using the above ratios, the following information may be obtained about the company:
1. Liquidity
In both years, 2010 and 2011, the company may be considered as liquid as shown by the current ratios of 1.4751 and 1.403125, respectively. A current ratio of more than 1.0 indicates that the company's current assets are enough to cover or pay its current liabilities. However, this may not be totally safe because the ratios did not reach 2.0, a safer figure in which the current assets should have doubled its current liabilities.
A better measure of liquidity should have been acid-test ratio, a ratio that takes into account the company's inventories, the most illiquid among all current assets. The acid-test ratio would have the formula, (current assets - inventories)/current liabilities. Relevant figures given in the financial statements include:
2010 2011
Inventory 25360 36360
Total Current Assets 72300 67350
Acid-test or quick ratio would be:
For 2010: (72,300 - 25360)/ 49,000 = 0.9579
For 2011: (67350-36360)/48000 = 0.6456
Acid-test ratios computed for 2010 and 2011 indicate that the company is not really that liquid as indicated by the current ratios. A large part of the company's current assets are inventories, the least liquid among all current assets. After deducting the inventories, it can be noted that the liquidity ratios were reduced significantly. The worse is they even reach below 1.00 indicating that the current assets are not enough to pay the current liabilities (liabilities that will mature within one year).
Comparing the two years covered by the study, the company deteriorated from 2010 to 2011. Both current and acid-test ratios decreased considerably, manifesting the decrease in the ability of ...
Education
- Bachelor of Science in Business Administration, University of the Philippines
- Master in Business Administration, Saint Mary's University
- Doctor of Philosophy in Education, University of the Philippines
- Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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