Financial Ratio Analysis Of Sharma And Ryan Company

Gross profit percentage

Question:

Discuss about the Applying information to the financial statement.

Gross profit sales percentage of Sharma and Ryan Company is observed to be 58%. This ratio indicates the relationship among total net sales revenue and gross profit. This serves as a vital ratio in analyzing the operational performance of the company (Batta, Ganguly and Rosett 2014). It is gathered that this ratio is high for the company in comparison to its competitor which is deemed to be favorable. Such high ratio indicates that the company has been capable enough in increasing its profitability through creating competitive product or services. This ratio serves as an important profitability measure through which the investors and analysts of Sharma and Ryan Company compare the identical companies within the overall industry. It is considered that the higher this ratio, the more the company is deemed to retain on every dollar of sales to service along with its other obligations and costs. 

Net profit percentage of sales of Sharma and Ryan Company is observed to be 10.35%. This ratio indicates the remaining profit of the company after every expense associated with administration, production and financing after deducting from income taxes, sales those are recognized (Brigham and Ehrhardt 2013). Net profit of Sharma and Ryan Company is observed to be lesser than its competitor who indicates the current sales practices of the company are not efficient enough in generating profits through revenue. This indicates the company’s decreased share price growth and increased profitability. Less net profit ratio signifies that the company is not that efficient enough in concerting its sales into profits as this is both a measure of overall business health and efficiency. The company is not that capable to generate increased profit per dollar of sales that is highly efficient. As the company has less net profit margin ratio, hence it is not that capable to survive a product line which does not address expectations or economic contraction period.

Return on capital employed of Sharma and Ryan Company is observed to be 30.81%. This ratio indicates the ways in which the company is efficient in gathering profits from the capital employed through comparing net portraying profit with capital employed. This ratio of the company is observed to be high in comparison to its competitor who indicates that the assets of Sharma and Ryan Company are performing better in consideration to long term financing (Bruce-Twum and Mensah 2015). A higher ratio of the company signifies that increased profit dollars are generated by every dollar of capital employed. Sharma and Ryan Company attained such high ratio through having smaller dollar amount of assets and increased profits that gave high return to the company. The result of the company indicates that the organization generates high earnings per dollar capital used. A higher return on capital employed value signifies high profitability and as the organization less assets along with similar profits as its competitors, it is deemed to have increased return value regarding return on capital employed with high profits. 

Net profit percentage

Debtor’s payment period of Sharma and Ryan Company is observed to be 34 days. This ratio indicates maximum time taken by a business to attain payments gathered in terms of accounts receivables. This ratio for the company is observed to be high in comparison to its competitor for the reason that its average number of days is high between the credit sales date along with date payment that is attained from credit sales (Gritta and Adrangi 2014). Such high ratio is not deemed to be favorable for the reason that a short collection period indicates better receivables management and fast collection. A longer collection day of Sharma and Ryan Company indicates negative impact on short term debt paying capability.

Creditor’s payment period of Sharma and Ryan Company is observed to be 29 days. This ratio indicates the average time taken by a company for addressing all its debts with trade suppliers or accounts payables (James, Stephen and Mark 2014). This payment period of the company is observed to be shorter in comparison to its competitor. This indicates Sharma and Ryan Company’s rapid payments to its creditors that ensure the creditworthiness of the company. The company is efficient enough to anticipate the average time it takes in addressing its debts with all its trade suppliers. If the turnover ratio is falling from a period to another is an indication that an organization is taking more time in paying off its suppliers in comparison to its previous time frames. In case if any day the turnover ratio increases, then the company is observed to pay off its suppliers at a rapid pace. 

Stock turnover rates of Sharma and Ryan Company is observed to be 12 days. This ratio serves as an indicator regarding the number of times inventory is sold or employed within a specified time (Weil, Schipper and Francis 2013). Stock turnover ratio of this company is less in comparison to its competitor that signifies poor sales along with increased inventory. Such results indicate that Sharma and Ryan Company could not efficiently sell its inventory in maintaining superior business performance (Pirie et al. 2015). The company requires enhancing stock turnover ratio as a high turnover will signify that it makes profit on every sale and how fast it sells inventory through maintaining increased profit. As this ratio is less for the company it can be stated that such low ratio indicates slow moving or obsolete inventories within the stock and is a huge indicator of maintaining unnecessarily large amount of inventories signifying poor inventory management. This is for the reason that it necessitates maintaining funds that might be employed within certain business operations. A factor that is deemed to impact such ratio is the application of just-in-time inventory technique.

Return on capital employed

Current ratio of Sharma and Ryan Company is observed to be 4.5:1.  This ratio indicates the company’s ability to pay short along with long term obligations. This ratio for the company is observed to be high in comparison to its competitor who indicates that it is capable enough to pay off its liabilities through employing its assets. A high ratio is observed which signifies sound financial health of Sharma and Ryan Company (Richard 2014). This revealed that the company’s operating cycle is highly efficient that is capable to convert its products into cash. As Sharma and Ryan Company has low inventory turnover it has less chances of facing liquidity problems once it is unable to decrease such obligations. However, this ratio also indicates that based on the ways in which the company’s assets are allocated, an increased ratio signifies it is not employing assets properly and not managing its working capital better (Thein 2015). As the current ratio of the company is observed to be more than 1, in such scenario Sharma and Ryan Company is deemed to pay all its bills on time. In addition, decreased values always do not indicate a major issue but can be of great concern for the management. This ratio provided an idea regarding the company’s operating effectiveness and in case of  Sharma and Ryan Company that indicates about the company’s high liquidity and is a signal that it is not facing problem with getting paid on its receivable or have effective inventory turnover. This serves as a symptom that the organization is not effectively using its current assets.

Acid test ratio of Sharma and Ryan Company is observed to be 3.7:1. This ratio indicates the capability of the organization to address its current liabilities at the time they come due with just quick assets. The company is observed to have less acid test ratio in comparison to its competitor that offers a realistic view of its liquid assets (Weil, Schipper and Francis 2013). However, Sharma and Ryan Company have this ratio more than 1 that is the desired range. This indicates the company has sufficient liquid assets to address its current liabilities. The company’s desirable ratio indicates that it offers a rigorous evaluation of its capability to address its current liabilities and it does the same through decreasing the liquid current assets from consideration. A low ratio of the company indicates that company’s efficiency has decreased in turning its inventory within sales (Wang 2014). 

Debtor’s payment period

Financial ratio analysis indicates the financial position of Sharma and Ryan’s Company in the initial year of its trading. Analysis of the company’s business and financial performance will facilitate it in making certain decisions associated with future expansion of the business (Webb 2013). It was gathered from the analysis that gross profit ratio is high for the company in comparison to its competitor which is deemed to be favorable. Such high ratio indicates that the company has been capable enough in increasing its profitability through creating competitive product or services. Moreover, ratio analysis also revealed that creditor’s payment period of the company is observed to be shorter in comparison to its competitor. This indicates Sharma and Ryan Company’s rapid payments to its creditors that ensure the creditworthiness of the company (Weil, Schipper and Francis 2013). In addition, company’s desirable acid test ratio indicates that it offers a rigorous evaluation of its capability to address its current liabilities and it does the same through decreasing the liquid current assets from consideration.

The company is observed to have high profitability ratio that makes sure of its superior business performance. This indicates the company’s capability to attain profit that remains from the earned income after eliminating expenses and costs associated with income earned. Profitability ratio of Sharma and Ryan’s Company indicates increased capability of the company in transforming its sales dollars within profits at all the measurement stages and generates high return for its shareholders (Wimmer and Rada 2013). Efficiency ratio analysis measured how well the company employs its assets and liabilities within the organization. Results from these ratios can facilitate the company in enhancing the company’s business performance along with outer creditors looking at the company’s profitability operations. However, results of stock turnover indicate that Sharma and Ryan Company could not efficiently sell its inventory in maintaining superior business performance (Pirie et al. 2015). The company requires enhancing stock turnover ratio as a high turnover will signify that it makes profit on every sale and how fast it sells inventory through maintaining increased profit. Improved receivables turnover ratio serves as major turnover ratios employed for evaluating the business performance. Moreover, this ratio also signified that the business is highly effective in using its working capital that is blocked in by debtors. This also signifies the frequency of conversion of receivables within cash for a specific financial year that makes sure of liquidity of the receivables of Sharma and Ryan Company.

Liquidity ratios analysis of Sharma and Ryan Company explained that the company’s operating cycle is highly efficient that is capable to convert its products into cash. As Sharma and Ryan Company has low inventory turnover it has less chances of facing liquidity problems once it is unable to decrease such obligations (Weil, Schipper and Francis 2013). This ratio signifies that the company must be careful regarding its risk of bankruptcy and how many times it can address its debt obligations relied on assets. Considering such results, the company is recommended to sell its inventory in order to pay its short term debt without selling its inventory.

References

Batta, G., Ganguly, A. and Rosett, J., 2014. Financial statement recasting and credit risk assessment. Accounting & Finance, 54(1), pp.47-82.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Bruce-Twum, E. and Mensah, C.C., 2015. Financial Statement Analysis.

Gritta, R.D. and Adrangi, B., 2014. The Use of Bankruptcy Forecasting Models in Teaching Applied Ratio Analysis in Investment and Financial Statement Analysis Courses.

James, W.M., Stephen, B.P. and Mark, B.T., 2014. Financial Reporting, Financial Statement analysis, and Valuation-A Strategic Perspective, 8. Edition, Cengage Learning.

Pirie, W.L., Broihahn, M.A., Robinson, T.R. and Henry, E., 2015. International Financial Statement Analysis Workbook.

Richard, P., 2014. The Role of the Accounting Rate of Return in Financial Statement Analysis. The Continuing Debate Over Depreciation, Capital and Income (RLE Accounting), 67(2), p.235.

Thein, M., 2015. Teaching financial statement analysis: a discussion on pedagogy.

Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), pp.955-992.

Webb, S., 2013. 350-01 Financial Statement Analysis.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Wimmer, H. and Rada, R., 2013. Applying information technology to financial statement analysis for market capitalization prediction.