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Financial Health Assignment Case Solution & Answer

Profitability

Now we analyze the profitability position for the company. First, we have calculated the net profit margin ratio because this is the single most important ratio for analyzing the trend of profitability and how much profits are generated on the total income earned by the company. In 2010, the net margin is negative as a net loss is generated because of the rising operating expenses for the company, however, it increased in 2011 and then declined again. This is related to the operating expenses and variability of the expenses is the reason behind this deviation of net margins.

Secondly, the return on capital employed was also negative in 2010 due to negative income and it follows the same trend like the net margin ratio. Similar is the case with the return on total assets ratio for the company. These three profitability ratios are closely linked to the operating expenses of the company which are highly variable and consist of a number of categories. Overall, the profitability position for the company is below average and this is a serious threat for the company. The profitability ratios for our company are shown in the table below:

  Year to Year to Year to Formulas
Profitability ratios:- 2010 2011 2012  
NP Percentage -0.434% 0.882% 0.135% Net Income/Sales Revenue
Return on Capital Employed -0.387% 0.682% 0.113% Net Income/(Total Assets-Current Liabilities
Return on Total Assets -0.378% 0.675% 0.111% Net Income/Total Assets

 

Liquidity

Thirdly, we analyze the liquidity ratios for the company. These ratios such as the current ratio and the cash ratio are highly important to analyze the liquidity position of the company and to determine how much short term assets does the company have to finance and repay the short term obligations as they fall due. The current ratio was 8.33 times in 2010 and then jumped up to 14.35 times in 2011 but then, has fallen to 10.85 times in 2012. The reasons for this are linked to the decline in the current assets and in the common size analysis, we discovered that there has been a sharp decline in the cash and cash equivalents for the company. This is a weakness for the company.

This is corroborated by the cash ratio for the company as the cash position for the company has worsened in 2012. The cash flow statements also show the lowest cash balance in 2012 and this might be due to inappropriate working capital management, increasing operating expenses and declining revenues. The liquidity position of the company currently is above average but if this trend is continued, then the company would not have enough short term assets to repay its short term liabilities. This is a threat for the company. The liquidity ratios are shown in the table below:

Liquidity Ratios:- 2010 2011 2012 Formula
Current Ratio 8.33 14.35 10.85 Current Assets/Current Liabilities
Cash Ratio 2.14 2.82 1.24 Cash and cash equivalents/ Current Liabilities

 

Long Term Solvency

Finally, we have calculated the long term solvency ratios for the company to analyze the capital structure of the company and what proportion of debt and equity is used by the company to finance its operations…………….

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