M2 Discussion Responce (I)

General Machinery Limited Case Study

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Running head: GENERAL MACHINERY LIMITED CASE STUDY 1

The major issues facing the company

The well-being of General Machinery Limited is being compromised by the various issues it is facing. One of the major issues that the company is facing is the presence of regulations that are unfavorable to the company’s operations. All activities have to be conducted using formal ways, an aspect that that affects efficiency. For instance, employees do not have the liberty of managing their wastes as they have to consult their leaders. The skills gap is the other major challenge affecting the effectiveness of the company. The company’s aging workforce is retiring leaving behind staff members that are inexperienced and lack the ideal skills. These conditions have led to the company losing its competitive advantage in the market.

The actions the company should take to improve its overall performance, addressing each of profitability, liquidity, gearing, activity, and shareholder return measures

General Machinery Limited lacks a defined direction due to lack of goals and objectives. It cannot tell what it needs based on lack of clearly-defined objectives. With the latter in place, the company would be in a position to track its performance. The viewpoint is likely to enable the firm improve its overall performance.

How the Statement of Cash Flows help you to interpret the ratios and financial performance of the company?

Cash flows play a vital role in the interpretation of companies’ financial performance and ratios. The cash flow statements of General Machinery Limited have enabled me to know the amount of money the firm gets from operations and investments. This interpretation puts me in a great position to understand whether I should purchase the company’s stocks or not.

The information does ratio analysis provide for meeting the requirements of the case questions

The financial ratios provide investors with vital information about the company they intend to invest in. In the case of General Machinery Limited, they enable individuals to tell the firm’s ability to pay their debts. The facts presented in the case allow persons who have interests in the company to know its financial strength, thus able to predict its future well-being.

The ratios are the most important, and which ones are of limited value? Justify your choices for the scenario

The ratios that are most important to a business entity are the return on equity and the return on assets (ROA). These ratios allow firms to know whether their income conforms to the amount of resources at their disposal. For instance, the ROA enables companies to determine whether they are utilizing their resources efficiently (Damodaran, 2001). On the other hand, the ratios that are of limited value are the price to sales and price to earnings ratios. The reason why they are limited is that they are majorly determined by external factors. Therefore, General Machinery Limited cannot rely on them to grow its revenues.

Why we should compare

a. The current year ratios with the prior year ratios- This comparison enables the management team to tell whether the company has experienced growth over the past year. It allows the company to evaluate its position in the market in relation to its competitors, thus able to tell the competitive mechanisms it needs to implement to stay ahead of its rivals.

b. The ratios of competitors in the same industry or some other benchmark- Analyzing the ratios of competitors in the same industry plays a vital role when it comes to making investment decisions. The analysis enables investors to evaluate the financial health of firms in the industry, thus able to tell the one that meets their needs and expectations.

The other computations used in ratio analysis, what else is necessary to properly analyze a company for investment

Besides ratio analysis, the other computation needed to analyze the company’s investment opportunities is the fundamental analysis (Damodaran, 2001). Under this approach, the assets, liabilities, and its overall well-being of companies are examined. The outcome of the scrutiny of the above-mentioned aspects is then compared to market conditions, such as the inflation rates and the exchange rate in the currency market. The comparison allows investors to tell if their company has sufficient resources to survive in the market.

References

Damodaran, A. (2001). Investment valuation: Tools and techniques for determining the value of any asset. New York: Wiley.