CASE STUDY

Joe's Fly-By-Night Oil Company's Financial Overview in 2011

Joe's Fly-By-Night Oil Company's Financial Overview in 2011

Ratio Analysis of Joe's Fly-By-Night Oil Company

In attempting to analyze financial statements through the use of financial ratios organizations should have the expertise to interpret them in order to bring about positive changing in the organizational performances. The paragraphs here onwards interpret the ratios to extract meaningful information for decision-making process (Guilding, 2002).

Liquidity Ratios

Current Ratio

This ratio is the measurement of company's capability to meet its short term financial obligations. It is calculated by dividing the current assets by current liabilities. The higher the ratio, the higher will be the liquidity, and the higher will be the company's ability to meet the short term obligations. If the ratio is below 1, it will indicate that company will be unable to meet its obligations given they are due before time (Brigham, E. and Houston, 2012).

Current ratio=

Quick ratio

This is refined form of current ratio. Since, not all inventories are liquid, so we define our liquidity after taking out the inventory. This ratio is also a measurement of company's ability to cover its short term obligations using cash and other current assets without selling its inventory (Brigham, E. and Houston, 2012).

Quick ratio=

2011

Current Ratio

1.5

Quick Ratio

0.5

Liquidity Analysis:

By above given liquidity ratios, we can analyze the liquidity position of Joe's Fly-By-Night Oil Company. The current ratio of the firm is 1.5, which a very signal. It means that company is able to meet its obligations before it is due. However, the quick ratio of the firm is .5, which indicates that Joe's Fly-By-Night Oil Company can cover its 50% of the obligations by cash without selling its inventory.

Asset Management

2011

Total Asset Turnover

0.3

Average Collection Period (in days)

109.5

Asset Management Analysis

The total asset turnover is calculated by dividing Net Sales by Total Assets. It tells the management's effectiveness in generating sales from investments in total assets. It measures the efficiency of managing company's all assets (Houston, J. and Brigham, 2009). The total asset turnover ratio is 0.3 times, which indicates that the company is not at all efficient in managing its assets by generating sales out of it. There is a strong need to manage the total assets of the company.

Secondly, average collection period is obtained by dividing Net Accounts Receivables by average daily sales. This ratio tells that the number of days it takes to collect the receivables from the creditors. Joe's Fly-By-Night Oil Company's average collection period is 109.5 days, which is too high. This means that the credit policies of the company are too flexible, due to which the debtor's take too long to pay off their debt.

Debt Management

2011

Debt Ratio

0.5

Times Interest Earned

15

Debt Management Analysis:

Debt management is a very important for a firm to run successfully. There are many examples of various companies that went bankrupt due to inefficient management of debt.

Debt ratio is obtained by dividing the total amount of liabilities by the total amount of assets. Debt ratio should be as small as possible, which would ...