Memo
To: Gemini Electronics
From:
Date:
Re: Financial Statement Ratio Analysis
The memo will outline a systematic financial statement analysis of Gemini Electronics and recommendations required for expansion. In this sense, the memo will present liquidity, asset and long-term management, profitability and final recommendations.
Liquidity Management
According to the industry current average ratios, there is a small increase between the year 2006 and 2007. However, the industry experiences a small decrease between the year 2008 and 2009 resulting from the financial depression. The horizontal analysis of the balance sheet indicates that there is a substantial increase in current assets between 2005 and 2009. Similarly, there is an increase in the value of inventory and P&E.
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The company cash and inventory ratio is slightly higher compared to industry average. However, in the year 2009, the value of inventory was below industry average. The cash ratio shows that the company is in a position to settle its debts and liabilities on a timely basis. Thus, the solvency position of Gemini electronics is less risky, and short-term debts can be paid using generated cash inflows.
Asset Management
It describes the company’s potential to convert an asset into cash. Asset management is considered to affect cash flow operations of the firm when day’s turnover is very high. According to the horizontal analysis of the balance sheet, turnover of fixed asset and total assets is less compared to the industry average. In a nut cell, it shows that Gemini Electronics is underutilizing its assets than the sales which can be generated by the industry. Further, in 2009 receivable collection period has declined below the industry standard period. The decrease in sales money collection may be linked to the demand from the retailers to be issued generous credit terms. Moreover, interest was not charged on overdue accounts.
Long-Term Debt Management
According to the debt and debt equity ratio of Gemini Electronics shows that the leverage is high compared to industry average. In this sense, leverage represents the amount of debt used by the company to finance its assets. Thus, high leverage ratio indicates poor financial performance compared to the industry since the firm has to pay interest on the debts regardless of economic conditions.
Profitability
Gemini Electronic profitability ratio shows the high cost of sales compared to other electronics firms in the electronic industry. The ratio shows sales income balance after expenses are deducted. For the company to raise the profitability ratio, the company may reduce expenses since it is not possible to generate additional revenue. As a result, gross profit margin will decrease and increase in indirect costs compared to other firms in the industry. Moreover, the leverage of Gemini Electronics is high since most of its assets are financed by debts.
Recommendation
Since it is difficult to develop additional revenue is not possible for the firm, to increase profit margin Gemini electronics should reduce its research and development costs. Also, focus on delivering quality products to increase customer brand loyalty on their products. Further, Gemini Electronic should develop a well-structured SWOT analysis and focus on growth rather the expansion.
ROE Analysis (DuPont Analysis)
| 2005 | 2006 | 2007 | 2008 | 2009 | |
| EBIT/Sales | 14.68% | 17.40% | 15.12% | 12.03% | 10.17% |
| EBT/EBIT | 83.2% | 84.44% | 78.24% | 81.52% | 77.40% |
| NI/EBT | 64.01 | 64.01% | 64.01% | 64.01% | 64.01% |
| TOTAL ASSET TURNOVER | 1.02 | 1.22 | 1.25 | 1.43 | 1.34 |
| DEBT RATIO | 61.84% | 68.74% | 69.71% | 64.12% | 62.01% |
| ROE | 22.86% | 40.82% | 34.20% | 28.44% | 20.15% |
