Chester's Return on Equity is at 8.8%. There are different ways through which ROE can be increased. Increasing the company’s debt capital, using more financial leverage, and improving asset turnover can help Chester to increase its ROE (Easton and Monahan, 2016). An attractive ROE indicates that Chester’s ROE is high compared to its low P/E. With a high ROE Chester can be able to generate high-profit margins with less capital.
To ascertain Chester’s working capital, the long-term debt of the company is subtracted from its current liabilities. Its long-term debt from current liabilities is at $49,700 while its long-term debt is $46,700. With information on the working capital of the company, there is the advantage of knowing the company’s working capital that is reflected by healthy ratios which reflect the health of the current assets and current liabilities. Moreover, current ratios are crucial as they help the company to ascertain its ability to pay short-term liabilities as well as assets (Aktas et al., 2015). Furthermore, knowing the working capital is valuable since it helps in maintaining a balance between the company’s current assets and its liabilities (Aktas et al., 2015). It also helps in boosting earnings by the company. To improve working capital, the company should incentivize its receivables in addition to effective inventory management.
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Chester’s Return on Sales is 4.1%. The sales of the company total at $112,562,280. As opposed to the company’s competitors, Chester’s rate of sales is sustainable. Return on Sales refers to the company’s operational efficiency which is generated annually by dividing total sales from the same period (Porto and de Abreu, 2018). To increase Return on Sales, Chester can increase its sales while at the same time it is decreasing its expenses (Porto and de Abreu, 2018). Decreased expenses come about due to reduced production costs.
Conclusively, Chester is doing well in that it is financially healthy. Financial concerns to be discussed would focus on cutting costs while at the same time increasing production to meet the customer demand. The COO, the department of managers, as well as the Board can take a more active role in increasing the company’s profits and revenue.
References
Aktas, N., Croci, E., & Petmezas, D. (2015). Is working capital management value-enhancing? Evidence from firm performance and investments. Journal of Corporate Finance , 30 , 98-113.
Easton, P. D., & Monahan, S. J. (2016). Review of Recent Research on Improving Earnings Forecasts and Evaluating Accounting‐based Estimates of the Expected Rate of Return on Equity Capital. Abacus , 52 (1), 35-58.
Porto, R. B., & de Abreu, F. A. (2018). Investment in online advertising and return on sales: Does it pay to outsource the services to an advertising agency? Journal of Marketing Communications , 1-18.
