2-3 pages Finance wk5 Assgnment in 30 hours
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Assignmentwk4Finance.docx
Module 2 Assignment:
Financial Health Assessment: Barry Computer Company
Report prepared by: Phenekia Morgan
Date: November 27, 2022
Walden University
WMBA 6070: Managerial Finance
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Part 1: Financial Information
Introduction
This paper provides a comprehensive financial statements analysis of Barry Computer Company. To achieve this objective, the analysis focuses on different ratios that reflect the financial performance of the company visa vis the industry performance.
Liquidity ratios
Current ratio: This ratio evaluates the proportion of the business's existing assets against its current liabilities. A current balance of more than one means that the firm has more current assets than current liabilities and is thus able to meet short-term claims (Welc, 2022). The current ratio of Barry Computer Company is 2, indicating that the company has a strong liquidity position. Comparably the current industry ratio is also two; thus, Barry Computer Company's liquidity position is within the industry performance.
Quick ratio: The acid test ratio of a company assesses its capacity to settle short-term obligations with its most liquid resources. The corporation does not have enough liquid assets to cover its short-term liabilities if the quick ratio is less than 1.0. Barry Computer Company's quick ratio is 1.3, which is the same as the industry average. This demonstrates that the company's liquidity position is stable.
Turnover ratios
Days sales outstanding: The capacity of a business to recover its receivables is measured by its days sales outstanding ratio. An organization's inability to collect its receivables is indicated by a high DIO ratio, which might cause financial difficulties. A low DIO ratio, on the other hand, shows that a business is effective in collecting its receivables. Barry Computer Company had 76 days of unpaid sales, compared to 35 days for the industry. This finding suggests that Barry Computer Company has trouble collecting its accounts receivable, which can result in a cash shortage.
Inventory turnover: This ratio indicates the frequency at which a business sells its stock. A high turnover ratio suggests that a business sells its inventory expeditiously. According to Welch (2022), low turnover ratio suggests that a business may have a buildup in stock. Barry Computers Company's inventory turnover ratio, which is 6.7, is the same as the industry average. The corporation sells its products roughly seven times a year. As a result, Barry Computers Company's inventory management is consistent with market expectations.
Total assets turnover: This ratio is a financial metric that measures a company's efficiency in using its assets to generate sales. A high total asset turnover ratio indicates that a company is generating many sales with relatively few assets, meaning that it is efficient in its use of assets. A low total asset turnover ratio indicates that a company needs to generate more sales with its assets, meaning that it is not efficient in its use of assets. Barry Computer Company has a lower asset turnover of 1.7 against the industry benchmark of 3.00. This shows that Barry Company is less efficient in using its assets to earn revenue.
Profitability Ratios
Net profit margin: The net profit margin is a reliable measure of a business's general effectiveness and profitability. A company that has a higher net profit margin is more effective and successful. A corporation that has a smaller net profit margin is more inefficient and less successful. Due to its higher net profit margin of 2.3% compared to the industry average of 1.2%, Barry Computer Company generates higher earnings than most of its rivals.
ROA: The ROA is a good indicator of a company's financial health. A high ROA indicates that the company is generating much profit from its assets, while a low ROA indicates not generating enough profit from its assets (Saleh et al.,2022). Barry Computer Company is generating slightly more profits than its competitors, as shown by its ROA of 3.9% against the industry's 3.6%.
ROE: The ROE is one of the most important ratios for investors to understand because it measures how efficiently a company uses its equity to generate profits. The higher the ROE, the more efficient the company is. Barry Computer Company is relatively more efficient than the competitors, as indicated by its ROE of 10.2% visa vis the industry benchmark of 9.0%.
ROIC: This metric measures how much profit a company generates for each dollar invested in capital. The higher the ROIC, the more efficiently a company generates profits. The ROIC of Barry Company is the same as the industry benchmark of 7.5%, indicating that the company is equally efficient as the competitors.
Solvency ratios
Times Interest ratio: The TIE ratio measures a company's ability to cover its interest expenses with its earnings before interest and taxes (EBIT). A company with a TIE ratio of 2.0 or higher is generally considered financially healthy, as it indicates earning enough income to comfortably cover its interest payments (Restianti & Agustina, 2018). The TIE of Barry Company is 3.3, while the competitors have 3.0 indicating that company earnings are enough to cover debt obligations.
Debt/Total Capital Ratio: The leverage of a corporation is determined by looking at its debt to total capital ratio. If a corporation has a high ratio, it is likely heavily indebted and may be at risk of defaulting on its debt obligations (Haralayya,2021). On the other hand, a low ratio shows that a corporation has a good financial position and is less likely to default. Barry Company is comparatively more indebted than the industry average, which stands at 47.0% versus the company's 48.5%.
Market ratios
Market to Book value: This ratio compares the market value of a company's assets to their book value. A high ratio means that the market value of the company's assets is greater than the book value. Barry Company's market value compared to book value is lower than that of its rivals. Barry's M/B ratio is 1.2 compared to the industry's average of 4.0.
P/E: It calculates how much investors are prepared to pay for each dollar of earnings generated by a company. A high P/E ratio indicates that investors are prepared to pay a high price for each dollar of earnings, while a low P/E ratio indicates that investors are willing to pay a low price for each dollar of earnings. Barry's company has a P/E of 11.79, but the industry has a P/E of 17.86; as a result, investors will pay more for the competitor's share than Barry's.
EV/EBITDA: This ratio is used to assess the value of a company. A high ratio indicates that a company is overvalued, while a low ratio indicates that a company is undervalued (Kadim et al.,2020). Barry Computer Company is undervalued because its EV/EBITDA ratio is 6.24 while the industry ratio is 9.00. This result shows that investors are likely not to be confident about the prospects Barry and will therefore prefer the competitors.
References
Haralayya, B. (2021). Ratio Analysis at NSSK, Bidar. Iconic Research And Engineering Journals, 4(12), 170-182.
https://www.irejournals.com/formatedpaper/1702793.pdf
Kadim, A., Sunardi, N., & Husain, T. (2020). The modeling firm's value is based on financial ratios, intellectual capital, and dividend policy. Accounting, 6(5), 859-870.
Restianti, T., & Agustina, L. (2018). The effect of financial ratios on financial distress conditions in sub-industrial sector companies. Accounting Analysis Journal, 7(1), 25-33.
https://journal.unnes.ac.id/sju/index.php/aaj/article/view/18996
Saleh, R., Mannan, A., & Aswan, A. (2022). Analysis of the Effect of Financial Ratios on Profit Growth. Hasanuddin Journal of Business Strategy, 4(1), 32-41.
https://feb.unhas.ac.id/jurnal/index.php/HJBS/article/view/511
Well, J. (2022). Financial statement analysis. In Evaluating Corporate Financial Performance (pp. 131-212). Palgrave Macmillan, Cham.
https://link.springer.com/chapter/10.1007/978-3-030-97582-1_3
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