In relation to the 2010/2011 fiscal years, it has come to my notice that the company’s general performance trend is slowly declining. In lieu of these findings, I have conducted a detailed analysis to try and elaborate our company’s financial position as at the end of the 2011 financial year.
After conducting a liquidity ratio analysis of the company, it is evident that the company has the ability to cover its expenses. The current ratio has declined from 5.3 in 2010 to 4.7 in 2011. This is a major indicator that current liabilities have increased especially the amount of long term debts. However, the current ratio indicates that the business has enough current assets to meet its current liabilities.
Generally, the company’s quick ratio value is beyond satisfactory. This indicates that the company’s rate of debt collection is not too slow. This value has since declined by a small margin of approximately ten percent.
Riordan Manufacturing Company is financially healthy and viable as shown by the solvency ratios. The debt to worth ratios are in both cases less than one. This implies the capital provided by the owners of the company exceeds the capital provided by the lenders. The debt to worth ratio of the company is at a safe level and has increased over the last two years.
During both years, the company has had a positive working capital which declined slightly between 2010 and 2011. This implies that the company’s ability to survive through hard times is decreasing. This is disadvantageous as it will shun away lenders. Also, it implies that there is inefficient utilization of working capital.
The company’s profitability margin has decreased slightly. This shows that the company’s distributing efficiency is slowly declining. The operating profit margin of the company is around fifteen percent for the two years with a slight decrease in 2011. This shows the total revenue earned by the company is decreasing as well as its operating efficiency. The net profit margin is approximately five percent. This means that around five percent of dollars earned by the company are translated into profit. This value has declined considerably over the two years.
After conducting a horizontal analysis, it is clear that the total current assets of the company have increased. The major increase though was that in total current liabilities with the others having a negligible change. This implies that the company has increased its borrowing and liabilities during the time period.
Generally, the vertical analysis of the company indicates that the company’s performance in the past two years has been on the decline and is marked by a major increase in debt allocation.
I, therefore, recommend that the company embraces a few other methodologies in order to alleviate this situation. One of the strategies that the company can implement is increasing current assets and paying down the massive debt in order to increase its leverage. Secondly, the company’s owners should increase their capital injection. Similarly, the company administration should also oversee sufficient use of working capital by investing in equipment.
Finally, the company should increase its operating and distribution efficiency. This could be achieved by use of modern transport systems and equipment. These strategies will in turn improve the pricing strategy and thus increase the revenue earned by the company as a whole.