This report includes that the financial ratio analysis and the suggestion for Mr. Adkins. There are three parts in the financial analysis: liquidity analysis, asset management capability analysis and profitability analysis. At the end of this paper, the recommendations to Mr. Adkins about the investment of Lamar Swimwear are produced. Financial Ratio Analysis Liquidity analysis. The meaning of a company’s liquidity is that the cash ability and the stability. Analyzing the liquidity we can get if the enterprise can repay long-term debt and short-term debt with its assets.
This is the key point that distinguish the company can develop health or not. The most important ratio we have to consider during the analysis of liquidity is Current Ratio and Quick Ratio (Thomsett, Michael C. 2007). According to the data in the balance sheet of Lamar Swimwear, we can find the total current assets and the total current liabilities. Divide current assets by current liabilities, we can get the current ratios in 200X to 200Z, Table 1. The higher the current ratio, the greater the liquidity of the corporate assets. The generally believed that the a reasonable minimum current ratio is 200%.
According to the table 1, it shows us the current ratio both in 200Y and in 200Z are below 200%, and the current ratios are declined year by year. However, the selected industry ratios are rising year by year and greater than 200% in 200Y and 200Z. It implies that the Lamar Swimwear’s debt paying ability is less than average and trending downward. Nonetheless, the liquidity analysis just with current ratio is limited, and the quick ratio make up for this limitation. Both current ratio and quick ratio are reflected the liquidity of the assets.
The quick ratio relative to the current ratio, deducted very poor liquidity assets such as inventory. The quick ratio is very stringent to show the ability of pay back the debt. Quick ratio should generally be maintained more than 100%, and the most appropriate proportion of quick ratio and current ratio is 1 to 1. 5 (Fridson, Martin S. ; Alvarez, Fernando 2011). The quick ratio of Lamar Swimwear is shown in Table 2. According to Table 2, we can get that the quick ratio of Lamar Swimwear is below both industry quick ratio and the general ratio 100%.
Combine the current ratio with the quick ratio of Lamar Swimwear, we can know that the stability of this company is weak, and the cash ability is decline year by year. The Lamar Swimwear has potential liability risks. Asset management capability analysis. Assets management capability also means the operating capacity and the business running ability of one company. The financial analysis of enterprises operating capacity ratio including that inventory turnover, accounts receivable turnover ratio, operating cycle, current asset turnover and total asset turnover.
Because the data and background information are limited in this case, so here I just analyze with total asset turnover. The total asset turnover ratio is an important indicator for examining corporate assets operational efficiency, and embodies all of the assets of the business during from input to output. Normal circumstances, the higher the value, indicating that the total asset turnover faster. The ability to sell is stronger, the higher the efficiency of asset utilization (Bragg, Steven M. 2012). We can find the sales and total assets from income sheet and balance sheet.
We can count down the total asset turnover with these two data in Table 3. According to the Table 3, we can get that the total asset turnover of Lamar Swimwear is higher and approximate with the industry total asset turnover. What’s more, in the 200X and 200Y, the data has a slight upward trend. However, in the 200Z the total asset turnover of the Lamar Swimwear has a significant drop. Compared to the industry data, it shows that the Lamar Swimwear has a large problem with assets turnover in the 200Z. For investors that is negative, because the total asset turnover comprehensive reflect the operating capacity of the whole enterprise.
In general, the more times total asset turnover the less turnover days, indicating the faster turnover and the stronger operating capacity. In the Lamar Swimwear case, the total asset turnover decline in the 200Z, it means that this company will need more turnover days in the future and the whole enterprise assets management ability of Lamar Swimwear is not good. Profitability analysis. The last and the most common ratio in the financial analysis is the net profit margin. We can do the profitability analysis by analyzing the net profit margin.
This ratio an important indicator to reflect the company’s profitability that after the deduction of all costs, expenses, and corporate income tax. As we all known that the higher net profit margin, the larger net profit that the company made. We can get the Lamar Swimwear’s net profit margin in the Table 4. It shows us the whole trend of the net profit margin of the Lamar Swimwear is decline although in the 200Z it has a slight upward. In addition, the net income margin of Lamar Swimwear is below the industry net income margin. In conclusion, the profitability of this enterprise is poor.
However, only concerned with the changes in the absolute amount of increase or decrease in net profit does not adequately reflect the change in the company’s profitability, but also requires a combination of the Growth in EPS (Table 5). For the investor, their utmost concern thing is that if their investment will generate acceptable returns especially for a public company. the growth in EPS is the most important index for the investors. According to the table 5, we can get that the growth in EPS of Lamar Swimwear is nearly double ecline and far less than industry growth in EPS. Therefore, the stock market of Lamar Swimwear is not good in the future. Recommendations In conclusion, the Lamar Swimwear is not a good choice for investment. Although just analyze with 5 ratios, income sheet and balance sheet is not enough to figure out if this enterprise should be developed well in the future, these data can partly reflects the financial trend both in the past and in the future. In my opinion, I highly recommend that Mr. Adkins should not buy the 15 percent of the Lamar Swimwear.
Bragg, Steven M. (2012). Business Ratios and Formulas: A Comprehensive Guide. Wiley Publisher. Fridson, Martin S.; Alvarez, Fernando(01/2011). Financial Statement Analysis: A Practitioner’s Guide. Wiley Publisher. Lamar Swimwear, 2013
Temte, Andrew (09/2005). Financial Statement Analysis. Chicago, IL, USA. Dearborn Trade, A Kaplan Professional Company. Thomsett, Michael C.(07/2007). Stock Investor’s Pocket Calculator: A quick Guide to All the Formulas and Ratios You Need to Invest Like a Pro. Saranac Lake, NY, USA. AMACOM Books.