The company has a backlog of customers that are unfilled and now the completion of those orders would be hectic to manage and might lose goodwill by delivering the orders late and would lose the customer’s future orders and thus, lower cash balances and profits. The company’s policy regarding the sales is 30 days net, however, it is apparent that the company’s management is ineffective in the collection of the sales proceeds and the receivable turnover is quite high. As a result of this, the receivables in the balance sheet are greater, and the cash balances are comparatively lower. As a result of this, the company loses the opportunity to earn interest on the excess cash due to which it will have to borrow the sum if required and pay interest on it as a result of which, the company’s profitability will decline.

Income Statement Analysis

Gross Profit Margin

The gross profit margin is calculated by dividing the gross profit by the net sales. This ratio explains the relation between the cost of goods sold and the sales. The results for Nov 78 and Dec 78 are 38% and 36% respectively.  The ratio after that is quite volatile and was highest on August 79 at 46% and lowest during March 79 at 27%. The volatile gross profit margin reflects that the prices are volatile, and the company has given discounts during the months of large sales especially during March and April and charged higher prices when the sales were comparatively lower.

Net Income Margin

The net income margin is calculated by dividing the net profits by the sales. This ratio explains the relation between the overall expenses and the sales. The results for Nov 78 and Dec 78 are 10% and 11% respectively. The other expenses during December were comparatively lower due to which the company’s net profit margin is greater in December, whereas, the GP margin was lower as compared to the results of November 78.  The ratio after that is quite volatile and was highest on Feb 79 at 18% and lowest during March 79 at 8%. The volatile net profit margin reflects that the prices are volatile and the company has given discounts during the months of large sales especially during March and April due to which the margin is lower and charges higher prices when the sales were comparatively lower as a result of which, the profit margin is higher.

Expenses to Sales

The expenses to sales are calculated by dividing the expenses excluding interest and tax by the sales. The expenses are stable, but the sales price is volatile, the company has given discounts in the months when the sales were greater and especially if the sales amount exceeded the budgeted sales figure for that particular month. This has made the ratio volatile ranging from 81% – 64%.

Return on Equity

The return on equity is calculated as a percentage of the return which the company received over the amount it invested. The company’s ROE had increased over time. It was 12% on November 78 and December 78 it was 30%. The increase in the ratio was due to the increase in profits and the buyback of shares in December which decreased the equity element. The ROE for March 79 and June 79 is greater than the ROE on December 78 and lower on Aug 79…………………….

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