Drive It Long Inc. is a competitor company to Callaway Golf Company, which began operations in 1982 and became a publicly traded company ten years later. In the course of this time, the company evolved from a manufacturer of golf clubs to a leading manufacturer and distributor of golf equipment and accessories. It presents significant competition to Callaway. Following the release of the 2016 audited financial results, this report reviews the financial performance of the company from multiple perspectives to determine how the company performed in 2016.
Financial Ratio Analysis
One of the ways one could analyze the performance is via the time and trend analysis. Trend analysis seeks to determine company performance based on the change of an indicator over time. More specifically for this case, time-trend analysis evaluates the change of a financial phenomenon between two observation points in time. When observing the change in short-term solvency, the current ratio was provided. This ratio compares current assets to current liabilities and expresses the company’s ability to pay off its obligations (Accounting Verse, 2017). The ratio increased from 1.1 to 1.15, indicating increased financial health in the 2016 financial year. The quick ratio was also obtained, which provides the company’s ability to pay off short-term obligations with liquid assets (Accounting Verse, 2017). A ratio of 1.0 is desirable for this case; the company has not achieved this mark but shows increasing trends towards increasing its ability to pay short term debts.
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Peer analysis is another method which one could use to analyze performance by comparing companies with similar characteristics to determine if the company in focus is performing up to par with its competition. In this case, asset utilization ratios are used to compare Drive It Long Inc. with Callaway Golf Company. Research indicates that Callaway had an asset turnover of 1.34 in 2015 and 1.22 in 2016 (Financial Morning Star, 2018) . In contrast, asset turnover for Drive It Long Inc. stood at 0.88 for the entire period. Essentially, this means that Drive It Long Inc. posted more efficient performance in terms of leveraging its assets to generate revenue. Inventory turnover for Callaway was 2.34 in 2015 and 2.44 in 2016, indicating an increased sales in the 2015/16 period. On the other hand, Drive It Long Inc. retained a high inventory turnover of 8.93, indicating that the company had over three times higher inventory moving from its production lines. Essentially, on these two fronts, asset utilization at Drive It Long Inc. is better than that of its competitor.
Financial ratio analysis is also another method which could be used to track the performance of an organization. From the short-term solvency ratios evaluated above, the company remains in a good position to pay off its long-term and short-term financial obligations from its assets (Accounting Verse, 2017). However, with regards to the short-term obligations compared with the assets alone, the company can cover just over 68% of this obligation. The cash ratio also reveals that the company has more current liabilities than cash. With regards to asset utilization efficiency, the company displays 88% efficiency in converting its assets to revenue-earning ventures as well as high inventory turnover. Inventory is exhausted in its stores at least eight times per year. With a high receivables turnover of 23.09, the company displays effectiveness at handing out credit and recovering debts from that credit. Lastly, long-term solvency ratios are contemplated. The debt ratio, which considers how much of the company’s assets are financed by debt remains at a healthy low of 0.38 in 2016, indicating that only 38% of the assets are debt-financed. On the other hand, debt-equity ratio considers the ratio of debt and shareholder funds used to finance assets. This value saw an increase from 0.58 to 0.6, indicating that the company uses more debt than equity to finance its assets. This is a healthy ratio. The equity multiplier rose from 1.58 to 1.6, indicating that there was increased use of debt than equity to obtain assets. Despite this increase, the high profitability of the company ensures that it is able to service these debts.
Financial Positioning
Financial positioning is done using the DuPont Identity, which considers return on equity as a function of three ratios, namely: total asset turnover, the profit margin and equity multiplier (Investopedia, 2018). Operating efficiency is the first measure to be evaluated. Accordingly, this is the ratio of business output to business input. As such, business efficiency is determined by the profit margin. Profit margin in the 2015/16 period stands at 11.96%, which indicates that the revenues of the business exceed the business costs by the same percentage points. This presents a positive profit margin. With higher sales, this means that the revenues accrued are higher than the costs put into the business. Contemplating this from a business perspective, however, this profit margin might not be suitable for sustainable operations bearing in mind the debt used for asset financing in the business model. However, the effect of this argument can be considered at the end of the DuPont Analysis.
Next, asset use efficiency is evaluated by considering total asset turnover. Asset efficiency looks to how much return (revenues) that input to assets brings back. Essentially, a higher asset turnover is desirable. Asset turnover for the study period stands at 0.88, which means that for every $1 invested in assets, $0.88 is the expected revenue. Asset turnover cannot be considered as a lone factor; industry comparison is necessary to judge whether asset turnover is good or bad. In this case, a comparative analysis with Callaway is obtained. Asset turnover in 2016 stood at 1.22; a value not much higher than that of Drive It Long Inc. As a result, this might be an indicator that Drive It Long could have moderate asset turnover for a company in this industry. Finally, financial leverage for the company is contemplate via its equity multiplier. The equity multiplier is a rather straightforward valuation that compares total assets and total equity. Essentially, it determines how much debt than equity is used to finance asset purchasing. Equity multiplier for Drive It Long Inc. currently stands at 1.6 whereas a calculation of the equity multiplier from the competitor, Callaway, indicates that it stands at 1.32. A higher equity multiplier indicates that the company has financed asset purchasing with more debt rather than raised stock prices. Indeed, the equity multiplier for Drive It Long Inc. is much higher than that of Callaway. Nevertheless, the business is operating more profitably than Callaway, which justifies the higher use of debt to finance asset purchases. Consequently, higher profitability indicates that the management is adequately servicing existing debt. Even though the company has used debt to finance its asset purchases, this is often cheaper than pursuing asset purchases by issuing additional stock. Consequently, this is a double-positive strategy for the company, so long as it stays profitable.
All in all, return on equity is calculated as a multiplication of the three factors. Return on equity currently stands at 16.85%. This value indicates how much the investors’ contribution brings back as profit, thereby indicating a company’s overall profitability. Again since the returns are positive, the company is profitable and there is sufficient justification for financing assets using debt. Until the return should be negative, there should be no cause for concern regarding higher debt.
PEG Ratio
The PEG ratio is also known as the price/earnings to growth ratio. It is the stock’s price-earnings ratio further divided by the growth rate of its earnings during a specified time period. This ratio contemplates a company’s stock value alongside the company’s overall growth, thereby providing a more comprehensive picture compared with the price-earnings ratio alone. In this case, the following information is provided:
25,000 outstanding shares; dividends as$20,000; Net income as $50,376; share price as $58 and growth rate as 9%.
, where
Essentially, the company’s PEG ratio stands at 9.48. In comparison, the documented PEG ratio for Callaway is 3.8, indicating that Drive It Long Inc. is performing better than its competitor. Moreover, it provides a more suitable investment for the potential investor because it has both the attractive price to earnings ratio and the supporting growth rate.
In conclusion, the firm’s performance could be summarily stated as favorable performance. 2016 showed good trends towards overall growth by maintaining high profitability, thereby giving Drive It Long Inc. the capability to purchase more assets. The company also maintained efficiency by ensuring that its assets provided favorable return on investment. High profitability also ensured that the company handles its short-term and long-term financial obligations, including debts, with ease. All in all, the company is running like a well-oiled machine.
References
Accounting Verse. (2017). Financial Ratio Analysis . Retrieved from Accounting Verse: http://www.accountingverse.com/managerial-accounting/fs-analysis/financial-ratios.html
Boundless Accounting. (2018). Using Financial Ratios for Analysis . Retrieved from Boundless Accounting: https://courses.lumenlearning.com/boundless-accounting/chapter/using-financial-ratios-for-analysis/
Financial Morning Star. (2018). Callaway Golf Co - Financials . Retrieved from Financial Morning Star: http://financials.morningstar.com/ratios/r.html?t=ELY®ion=usa&culture=en-US
Investopedia. (2018). DuPont Identity . Retrieved from Investopedia: https://www.investopedia.com/terms/d/dupontidentity.asp
Soliman, M. T. (2008). The use of DuPont analysis by market participants. The Accounting Review, 83(3) , 823-853.
