Financial reports convey information that involves assisting and analyzing and also interpreting the financial position of an organization. This report will examine three areas of analysis which incorporate profitability, the effectiveness of management policies and the financial stability of the business.
Profitability ratios are seen as the business’s ability to earn an income within the present financial formation of the business.
Prices start at $12
Prices start at $11
Prices start at $10
Net Profit Ratio
The net profit ratio designates the ability of the business to generate a return on the owners’ investment. For a business to have a high net profit ratio, this means that their operating revenues are high and that their operating expenses are low. If a business has a low net profit ratio, complications arise as it means that they may have higher expenses and that their selling margin is low. Benchmarks for net profit for the three year period were as follows; for 2007 it was 8.5%, for 2006 it was 9.00% and for 2005 this was 8.00%.
These benchmarks, when compared to that of Highway Industries are lower which means that Highway Industries is performing at a consistent level. Since 2005, the net profit ratio has risen from 8.44% to 11.88% in 2006. Although it was still above the industry average, the net profit ratio dropped in 2007 by 1.85% to 10.03%. Whilst the business may have dropped in percentage from 2006 to 2007, it rose 1.59% since 2005. This positive net profit indicates that the business has high revenues and low expenses.
Rate of Return on Owners Equity Ratio
Rate of return on owners’ equity ratio specifies the return to the owner on the amount invested in the business. For a business to have a high return on equity ratio means that the business may indicate management efficiency. For the business to have a low ratio, could mean that their management is inefficient and that it could be beneficial for them to invest elsewhere.
The rate of return on owners’ equity ratio is significant for the owner it will be evaluated with other returns on different types of investments to verify if the business is a worthwhile investment opportunity. Highway Industries is impressively above the industry average and has maintained this over the three year period. As with the net profit, this figure has decreased since 2006 but is still increasingly higher than the set benchmark which is set at 12.00% for 2005, 11.00% for 2006 and 13.00% for 2007.
In 2005, 2006 and 2007 these figures were 18.60%, 21.63% and 16.24% respectively. Since 2005 this figure has decreased by 2.36%. This drop-in percentage could indicate that the business should invest in other places or that it should increase its net profit by reducing expenses.
Effectiveness of Management Policies
Effectiveness of management policies is how successful managers have been directing and maintaining the set policies of a business.
Turnover of Accounts Receivable
Turnover of inventories rate measures how effectively the business is administrating their accounts receivable. Highway Industries turnover of accounts receivable is as follows; 2005 was 61 days 2006 was 61 times and 2007 was 61 times. These benchmarks are higher than that of Highway Industries and therefore signify that the business has a tight and effective credit policy.
The figures for the three year period were as follows; for 2005 it was 65 days which was above the industry average by four days, in 2006 it was 55 days and in 2007 this figure was 58 days. If the business had a low ratio, it would cause some concern as it would mean that they would have a higher chance of having bad debts.
The financial stability of a business refers to the short term liquidity and long term solvency.
A quick ratio indicates the business’s ability to meet its immediate financial obligations such as accounts payable from its immediately accessible or quickly converted assets such as cash and accounts receivable. With a high ratio, the business can be assured that the current liabilities are being paid by the current assets. If the business has a low ratio, this would cause concern as it would indicate that the current liabilities are being paid by the inventory turnover. the following were the benchmarks for 2005, 2006 and 2007; 0.55:1, 0.58:1, 0.62:1 respectively.
These figures were higher than that of Highway Industries. For 2005 the quick ratio was 0.50:1 which was lower than the set benchmark, this low ratio remained for 2006 as the figure was set at 0.50:1, but decreased to 0.48:1 in 2007. this drop in ratio is a matter of concern for the business as it means that the turnover of the assets is paying for the liabilities which shoud be paid for by the current assets. For the business to increase their ratio, they should look at decreasing their current liabilities and increase current assets by increasing sales revenues.
Debt ratio signifies the way in which the business is financed and how much the business is borrowing. For the business to have low ratios is an advantage as it means that assets are being funded by owners rather than borrowings. Set benchmarks for the industry is higher than that of Highway Industries, which indicates that the business is generating assets through the owners money rather than borrowings. The set benchmarks for 2005 was 57.00%, 2006 60.00% and was 62.00% for 2007. Highway Industries ratios were as follows, 2005 50.75%, 2006 49.29% and 2007 was 47.36%. For the business to maintain this low ratio they may decrease debts through repayments and minimise the need to hold large assets.
Overall, the business Highway Industries is operating adequately, although there are different aspects of the business that need to be improved. Areas of concern include the decrease in figures since 2005 and 2006 through to 2007. These declines need to be investigated as the business would not like it to keep decreasing as it would not be beneficial for the business. The quick ratio also poses some concerns as it below the benchmark average.
For the business to increase this ratio, they should try to increase their current assets while decreasing their current liabilities. Expenses should be monitored regularly and there should also be an increase in sales revenue.
To increase net profit – increase sales revenue and reduce expenses
To increase return on owners equity ratio – owner can contribute more capital and increase net profit
To increase turnover of accounts receivable rate – tighten credit policy, communicate regularly with those with credit accounts via email, telephone, follow late or overdue accounts, offer discounts
To increase quick ratio – increase current assets, increase sales revenue, decrease liabilities
To decrease debt ratio – minimise the need to hold large assets, minimise the need to borrow, try and decrease debt.
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