Financial ratios analysis Essay

NoCarb Limited Ratio Analysis will cover four ratio groups: Liquidity, Profitability, Activity and Financial structure ratios, in order to have a better understanding of company financial position. Liquidity ratios Measure the organization ability to satisfy its requirements for cash to meet its obligations based in its current assets. Cash is very important to keep company’s operations running. A failure to do that could lead the company to major problems, even a risk of bankruptcy. Nocarb current ratio has improved in 0.44 (1.48 – 1.04) from previous year (2013), this is basically due to the increase of inventory levels and the conversion of receivables to cash. Quick ratio has decrease only in 0.02 (0.37 – 0.35); not a significant variation. Quick ratio does not consider â€Å"Inventory†, which in this case is not a good idea to omit it, because we do not know how much divers are Nocarb’s products. We only certain about inventory being made up of soft  drinks. Profitability ratios To measure profitability performance, we are going to analyse profit margin and ROA ratios. Alternative Profit margin indicates the percentage of profit we get from each dollar of sales. In the case of Nocarb has increased in 0.96% (16.24 – 15.28) with respect to 2013. Soft drink industry profitability depends more from the volume of sales rather than the high profit earn from each unit. This industry is completely different from, for example High Tech industry, where volume of sales is small but with a high rentability per unit or service. There is a significant decline of 1.22% (4.61-3.22) in the ROA ratio (also known as ROI). This value indicates that Nocarb is losing efficiency at the moment to generate profit. We need to analyse activities ratios to have a better picture of Nocarb financial position. Activity (turnover) ratios From Note 2 we can see that Inventory level s have constantly increased since 2012. It is not a surprise that â€Å"days in inventory† has increased from 285 days to 760 days. This indicates that Nocarb have serious problems with the associated cost of keeping high level of inventory like insurances, obsolescence, handing and warehouse renting cost. This is also reflected in the drop of sales from 59860 in 2013 to 43014 for this year. Nocarb sales on credit. Therefore is important to analyse â€Å"days in debtor† indicator, which indicate how long it takes for Nocarb’s customers to pay their debts. We can see that it is taking longer for customers to pay their bills from 285 days in 2013 to 760 days this year. If this becomes a tendency Nocarb can be in risk of running out of cash, necessary for daily operations. This also indicate that Nocarb it is over financing its customers. Financial structure ratio After analysing Nocarb’s liquidity and activity ratios, which indicates a poor performance, we need to measure the borrowing level of Nocarb. â€Å"Debt to Equity† will help us to see how risky this company is. Debt to Equity ratio has significantly decreased from 294.53% in 2013 to 178% this year but it is still a high level. A ratio of 178% indicates that Nocarb assets are financed mostly with debt, making Nocarb more vulnerable to any fluctuation  of interest rates. Conclusion Soft drink industry is a mass production industry. We assumed Nocarb does not have a unique product as most of its counterparts. This industry relays in high levels of sales, maximum inventory turnover and minimal levels of inventory to reduce costs. Profit margin ratio is not a good indicator for Nocarb due to the low profit margin per unit; usual for mass production industries. Nocarb has serious problems with high levels of inventory and its associated additional costs. This situation is a result of the decline of sales and the increase of inventory, more probably financed by debt as â€Å"debt to equity† ratio indicate. Nocarb need to redesign its Sales and Marketing strategies. Review its supply chain and inventory strategies. Review its Credit Policies and promote Cash sales. Also needs to be very care full with its borrowing/debt level.