Current Ratio
Current Ratio= Current Assets / Current Liabilities
Current assets= 23800000
Current Liabilities= 30200000
23800000/30200000= 0.79
The current ratio is 0.79
The purpose of calculating the current ratio is to identify whether the firm has adequate resources to pay its debt over the next 12 months. When the current ratio is below one as in the case of STIA, it means that the current liabilities exceed the current ratio, therefore, there is a deficit in liquidity ( Durrah, Rahman, Jamil, & Ghafeer, 2016) and the firm may experience problems in meeting its short-term obligations.
Debt Ratio
Debt ratio= Total Liabilities / Total Assets
Total Liabilities=30200000
Total Assets =36800000
30200000/36800000=0.82= 82%
This means that 82% of the company’s assets are financed through debt while the remainder is financed through equity. According to Benge (2018), STIA, therefore, has taken up a large amount of risk and is highly leveraged. If the creditors were to ask for repayment abruptly, the company would be in significant danger.
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Profit Margin
Profit Margin= Net Income/Net sales
Net Income= 500000
Net sales= 47100000
Profit margin= 500000/47100000=0.01/1 %
STIA’s profit margin is low showing that the company does not operate efficiently. It faces the risk of being unable to pay off its expenses and retain earnings for future growth. In the case the sales decline, the company will face a major net loss.
Inventory Turnover
Inventory turnover= Cost of goods sold / Average inventory
Cost of goods sold= 26200000
Average Inventory= Beginning Inventory + Ending Inventory /2
AI= 21100000+19400000=40500000/2=20250000
Inventory Turnover =26200000/ 20250000=1.29
Inventory turnover measures the number of times a company was able to sell its total average inventory amount in a specific year. The speed at which a company can sell its inventory is a critical measure to its performance (Madhusudhana & Prahlada, 2009) .STIA’s Inventory turnover is low meaning that its sales are weak and it may be holding too much inventory.
References
Benge, V. A. (2018, October 25). What Is a Good Debt-to-Asset Ratio? Retrieved November 4, 2018, from https://bizfluent.com/info-8057096-good-debt-asset-ratio.html
Durrah, O., Rahman, A. A., Jamil, S. A., & Ghafeer, N. A. (2016). Exploring the Relationship between Liquidity Ratios and Indicators of Financial Performance: An Analytical Study on Food Industrial Companies Listed in Amman Bursa. International Journal of Economics and Financial Issues , 6 (2), 435-441. Retrieved from http://www.econjournals.com/index.php/ijefi/article/viewFile/2045/pdf
Madhusudhana, C., & Prahlada, K. (2009). INVENTORY TURNOVER RATIO AS A SUPPLY CHAIN PERFORMANCE MEASURE. Serbian Journal of Management , 4 (1), 41-50. Retrieved from http://www.sjm06.com/SJM%20ISSN1452-4864/4_1_2009_May_1-136/4_1_41-50.pdf
