Analysis of Company ratio



Analysis of company

Memorandum to CEO of Company

Date: January 11, 2013

To: CEO of the company

From: Financial executive of the company

RE: Analysis of company's financial position

Thank you for trusting in our capabilities and providing us the opportunity to work with one of the best company of the country and with such experienced employees. As per your assigned task, our team has cautiously evaluated the financial performance of the company with compare to market performance and performance of preceding years.

To analyze the financial performance of the company we have calculated liquidity ratios, profitability ratios, and Debt ratios, and have analyzed that company has performed well in majority of areas throughout the last year. For the convenience of higher management, we have included a brief analysis of calculated ratio below.

Analysis of company ratios

Current Ratio

Current ratio is also known as cash ratio, cash asset ratio, liquidity ratio. This ratio is calculated by using the formula CR=CA/CL. the prime objectives of this ratio are that is provides effective information regarding company ability of repaying its short-term obligations with the help of cash of the company, short-term investment (bringham & Ehrhardt, 2011).

The current ration of G Company for the year 2012 is 1.74 as compare to 1.86 in year 2011. This indicates a slight decrease in the current ratio means that company is facing few problems in keeping up the current assets in optimal level. Slight decrease is not a worrying sign for the company as it is still above one that represents sound financial condition of the company. Further, the current ration of the company is way behind the industry current ratio and this means that company is not performing according to the standards set by the industry and is facing tough competition.

Acid-test ratio

This ratio is the prime indicator that represents company's ability of paying of its short term liabilities without selling of its inventory. This ratio is calculated using formula.

Acid-test ratio = Current assets/Current liabilities

The company acid-test ratio for the year 2012 is 0.46 percent as compare to 0.64 in 2012. Like current ratio, a slight decrease in this ratio from previous year, and is lower than market ratio. This decrease is could prove to be a weakness of the company as it indicates that company might be selling of its inventory for the payment of its short term liquidity.(Gibson, 2010).

Inventory turnover

This ratio describes the efficiency of the company in selling and replacing of inventory for a particular time. This ratio is calculated using formula Sales/inventory or by using COGS/average inventory. The inventory turnover ratio for this company during 2012 is 4.6 days as compare to 6.1 days in 2011. Decrease from previous year is consider as a slight improvement as company has reformulate is inventory turnover process and as a result has able to improve its inventory turnover (Gitman & McDaniel, 2008). Further, inventory turnover of this company is well below the industry average, which clearly indicates that company is performing much better than its competitors ...