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CANGO FINANCIAL ANALYSIS REPORT

 

 

 

 

 

 

CanGo Individual Financial Analysis Report

DeVryUniversity

Bus460 Senior Project

Tera Riley

March 18, 2014

 

CanGo Financial Analysis Report

Introduction – The success of a business depends on its ability to remain profitable over the long term, while being able to pay all its financial obligations and earning above average returns for its shareholders. This is made possible if the business is able to maximize on available opportunities and very efficiently and effectively use the resources it has to create maximum value for all involved stakeholders. One way the performance of a company can be measured on critical areas such as profitability, its ability to stay solvent, the amount of debt exposure and the effectiveness in resource utilization, is performing financial analysis where a set of ratios show a very good way of getting a snapshot of company performance and future prospects. Financial analysis is also a very useful technique that forms a basis for taking key decisions about company operations (Russel, P. R., 2004). In addition to internal company members such as leadership and the company board, these are used by potential investors and shareholders to make investment decisions about the company (Finch, H., n.d.). In the excel sheet attached to the next section, ratio analysis is performed along with details on how the ratio is computed and meaning and importance of the numbers, which provide a very good snapshot of CanGo performance.

 

Key Ratios included in Financial Analysis – The different types of ratios which are used for analyzing a firm are defined below, and in the next section applied to CanGo number to get an understanding of its financial condition.

Inventory turnover ratios – The two inventory ratios determine the effectiveness with which the company is able to sell inventory and collect receivables, which is critical for successful utilization and an indicator of how effectively it is operating. The first ratio is called as inventory turnover ratio, which is calculated by dividing the cost of goods sold by average inventory. "The inventory turnover ratio is an indicator of how many times the company is able to turnover its inventory, meaning better utilization. The higher the ratio, the better the company is performing, which shows the company is very effectively using its resources and capabilities, to turn its inventory multiple times over. The second ratio in this type is the receivables turnover ratio, which is calculated by dividing the net credit sales by the total account receivables. The receivables turnover ratio is an indicator of a company's ability to collect cash from credit customers. This is an important ratio as a company would need to be able to actually get money for credit sales, if it has to be able to meet its capital and debt obligations

Profitability ratios – The profitability ratios of return on net sales and rate of return on total assets are indicators of profitability of company operations. Return on sales shows the percentage of each sales dollar earned as net income, essentially the amount of profits generated that translate into net income. The higher the number, the better it is for the company as a larger percentage of its sale is getting converted into income or profit for the company. Return on Assets is an indicator of how profitably a company uses its assets, essentially how best it has been able to put to use the capital and resources deployed to generate returns. The higher the returns, the better it is for the company.

Current ratios – The three measures include working capital, current ratio and quick ratio are very good indicators of the company’s ability to remain solvent and have the necessary resources to meet its business obligations. Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

Debt ratio -The Debt/Equity ratio is a measure of a company's financial leverage and indicates what proportion of equity and debt the company is using to finance its assets. A high number indicated that the company is highly leveraged and would have to pay a lot of interest to meet its debt obligations.

 

CanGo Financial Analysis – The financial analysis performed on CanGo financials to come up with various indicators on profitability, debt, efficiency and its ability of remaining concern are discussed in the above section are included in the below attached excel sheet.

 

Conclusion – The financial analysis performed gave a very good insight about CanGo financial performance. It can be seen that CanGo has very low profitability ratios and is also not able to effectively use it resources as shown by low turnover ratios. Also, the company is leveraged a lot as can be seen from a high debt equity ratio. All these show that it is very necessary for CanGo to now take better control of financial performance, and focus on generating cash for the company, make better use of available resources and ensure that they are able to generate good returns for the company and its shareholders. The company should focus on not taking on more debt, but on better using its existing resources and infrastructure to generate more cash from its existing businesses. It is recommended that the company use these inputs as part of its strategic planning process to create best value and out the company on a path to sustainable growth (Chaudhary, J., 2007).

 

References

Chaudhary, J. (2007, December). Why Ratio Analysis Plays An Important Role In Business Strategic Planning. Retrieved September 16, 2011, from http://ezinearticles.com/?Why-Ratio-Analysis-Plays-An-Important-Role-In-Business-Strategic-Planning&id=897775

Finch, H. (n.d.).Financial Ratios. Encyclopedia of Management. Retrieved September 16, 2011, from http://www.enotes.com/management-encyclopedia/financial-ratios

Russel, P. R. (2004, August). Financial Statements Analysis. Retrieved September 16, 2011, from http://faculty.philau.edu/lermackh/financial_analysis.htm