Ratio Analysis
Current ratio = Current Assets /current liabilities = 1.4
Quick ratio = Current Assets – inventory / Current liabilities = 1.07
Days sales outstanding = Accounts receivables/ Credit sales * 365 = 68 days
Inventory turnover = Cost of goods sold/ Average inventory = 22.28 times
Total Assets turnover = Net sales / Average total Assets = 1.61 times
Profit margin = Net income/Net sales =0.017 or 1.7%
Return on Assets = Net income/ Average total Assets = 0.027 or 2.73%
Return on Equity = Net income/ Shareholders Equity = 0.06825 or 6.8%
DuPont analysis
ROE = Profit margin * asset turnover * equity multiplier = 1.7 * 1.61* 2.5 = 6.843
From the ratio analysis, most of the parameters are below the industry average. The current and quick ratios are low indicating that the company might be unable to meet its short-term obligations when they fall due. The days' sales outstanding indicate that the company takes longer almost twice the industry average to collect its receivables. The inventory turnover indicates that the company is turning over its inventory more than the industry average ( Brigham & Houston, 2016).
The total assets turnover is below the industry average indicating that XYZ is not utilizing its assets well to generate sales. The profit margin is 1.7% which is higher than the industry average showing that the sales are generating adequate income for the company. The returns on assets are below the industry average indicating that the company is not making sufficient revenue to cover its average assets. The returns on equity are lower than the industry average meaning that the XYZ is not returning adequate returns for its shareholders. The strength of the company is its ability to turn over its inventory and generate more profits from its sales. XYZ needs to improve on the other parameters to be equal or more than the industry average ( Sherman, 2011).
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Investment analysis
Before making any investment in the manufacturing industry, there are qualitative factors that need to be evaluated. Key among them includes the quality of the management in which case, and you need to determine their experience, the type, and size of the company and their expertise. The staff of the company should also be considered in making investment decisions. Are they professional in their work, what about their turnover rates? Another qualitative issue is the organizational structure regarding structural changes and mergers and acquisition. The competitive advantage of the company regarding its products and superiority in its production needs to be considered. How are the manufacturing processes, what technologies does the company have and what are the prospects in the industry. The timeliness and quality of financial reports also determine the possibilities of investing in the business. If the potential company makes timely reports while providing adequate information, they can be an indication of financial health and therefore worth spending. The response of the prospective investment company to customer requests or complains or even request for information determines its viability as an investment destination. The company should be treating its customers with care and be able to provide relevant and adequate information when needed ( Downes & Goodman, 2014; Hall, 2010).
From the investment analysis, a comprehensive ratio analysis should be conducted to determine the viability of the company as an investment option. Five ratio analyses will be performed including liquidity ratio. The ratios will indicate the ability of the company to pay its debts when they fall due. They show if a company has sufficient short-term assets that will cover short-term obligations or if it is not generating cash flows to cover the recurring costs. Some of the rations in this category include current, quick, operating cash flows and cash ratio. The second group of ratio analysis is the activity ratio which indicates the efficiency of the investment company. They show how well the company uses its resources to generate sales. Some of the most useful ratios in the category include inventory turnover, payables turnover, receivables turnover, working capital, fixed assets turnover and total assets turnover. A third type is leverage ratios also known as debt ratios. They include debt to equity, interest coverage and debt ratio. The ratios demonstrate the ability of the company to their long-term debt. Performance ratios are the fourth category in which they determine the profitability of the business. They include gross profit margins, operating profits margins, net profits margins, return on equity and return on assets. Lastly, the valuation ratios will be determined. They offer a clear picture of whether the stocks of a company are worth investing at the current level. Some of the ratios in this category include price earning, price per cash flows, price per sales and price earning or growth rate ( Sherman, 2011).
Non-financial factors to determine before deciding on whether to invest in the company include the swot analysis and the company objectives and strategy. They offer a clear picture of the business, its long term and short term goals and whether the investment fits the corporate strategy and objectives. The safety of the employees, need to maintain the current product line and entry into new product lines are additional non-financial factors. Any project that is hazardous to the employees or the community should be disregarded despite having good returns. Similarly, if the company has a profitable product line or desires to introduce a new one, then it becomes an attractive investment option for any potential investor. Other factors to consider include the availability of raw materials, power, essential amenities, human resources and motivation level, the location of the company, technology, competition, government support and restrictions, environmental concerns, legal requirements and the tax benefits and incentives. Similarly, the qualifications of the management and available capacity all determine the attractiveness of an investment company as they affect its future performance ( Sherman, 2011)
Forecasting
There are three approaches to forecasting the performance of the company, i.e., evaluating the historical performance of the company and using the past growth rate to project. This is especially applicable t stable firms. However, there are dangers of using this technique in high growth firms. It is difficult to estimate the growth rate, and if it is determined, it cannot be adequately relied on to predict future growth. The second approach is to use equity research to come up with an estimated growth rate which is used in the valuation. One drawback to this technique is that growth estimates over long periods can be misleading to erroneous and inconsistent values. A third approach is to estimate the growth of the firm from its fundamentals. The growth of the company is determined by how much it invests in new assets. The quality of the original investments also needs to be considered. Any acquisitions, distributions, and build-ups or expanding marketing capabilities are estimated to determine the fundamental growth rate of the company. Most of the fundamentals remain the same for all firms and therefore it is possible to determine the growth of a manufacturing firm. In forecasting revenue and growth, determine the expenses of the company, its costs both fixed and variable, forecast revenues using an aggressive and conservative case and then determine the key ratios to determine whether the projections are correct, determine the gross margins and operating profit margin. The forecasted revenues, profitability and asset management for the investment company can be determined using the fundamentals of the business. The existing assets and the growth assets can be instrumental to the growth of the company as they discover its ability to generate future cash flows. The historical growth should be considered to determine the company's operations as an indicator of future growth. With the past data and estimates from analysts, it is desirable to make growth endogenous my making it a function of the reinvestments for future extensions. The liquidity ratios, activity and performance ratios will be used in this case. In addition to the forecast and ratio analysis, swot analysis, location, management and sustainability of the company will be determined (DeRezende, 2011; Fight, 2005).
References
Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage.
DeRezende, F. C. (2011). The structure and the evolution of the U.S. financial system, 1945–1986. International Journal of Political Economy, 40(2), 21–44.
Downes, J., & Goodman, J. E. (2014). Dictionary of finance and investment terms (9th ed.). Hauppauge, NY: Barron's.
Fight, A. (2005). Cash flow forecasting. Jordan Hill, GBR: Butterworth-Heinemann. : Cash Flow Forecasting of Financial Statements.
Hall, R. E. (2010). Why does the economy fall to pieces after a financial crisis? Journal of Economic Perspectives, 24(4), 3–20.
Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: Amacom. Chapter 3: Financial Analysis Using Ratios.
