The following is a balance sheet analysis of Superior Company for the three years:
Summary discussion
Current ratio: the current ratio for the company indicates that the firm is able to cover the current liabilities at least twice. The trend however shows that this ratio has been decreasing over the years although it has not gone below 2. The only concern for the CFO here is to ensure that the ratio does not go below 2 in order to ensure that the company’s current assets are always able to cover the current liabilities. The CFO should also strive to understand the reason why the current ratio is decreasing and take corrective action in order to ensure that the company is able to meet its short term obligations as and when they fall due (Bekaert & Hodrick, 2011).
Working capital ratio: the working capital shows the efficiency of the company in terms of being able to cover the short term liabilities as they fall due using the current assets. The analysis shows clearly that the company is able to cover its short term liabilities using its current assets. This therefore means that the CFO should strive to maintain this trend. The working capital ratio is meant to show whether the company is able to carry out its operating activities in the short term. This is indicated by the difference between the current assets and the current liabilities. The trend revealed in the analysis shows that the company has sufficient working capital and therefore no worries for the CFO (Scott, 2003).
Short term debt to equity ratio: the short term debt to equity ratio shows how well the company is leveraged in the short term. This is in terms of how much the company funds its operations from short term debt compared to how much is funded by shareholders equity. A highly leveraged company lowers the risk of bankruptcy of the company in the short term. The CFO of Superior company should strive to increase this ratio in order to ensure that the risk of bankruptcy remains low (Schilit, 2002).
Long term debt to equity ratio: the long term debt to equity ratio shows how well the company is leveraged in the long run. This is in terms of how much the company funds its operations from long term debt compared to how much is funded by shareholders equity. A highly leveraged company lowers the risk of bankruptcy of the company in the long run. The CFO of Superior company should strive to increase this ratio in order to ensure that the risk of bankruptcy remains low in the long term (Libby & Short, 2001).
In general, the company seems to be doing well however, the CFO should continue to improve the performance of the company.
References
Bekaert, G, & Hodrick, R.J. (2011), International Financial Management, 2nd edition, New Jersey, Prentice Hall.
Libby, R., Libby, P.A. & Short, D.G. (2001) Financial Accounting, New York, McGraw-Hill,
Schilit, H. (2002). Financial Shenanigans, 2nd Edition, New York, New York, McGraw Hill
Scott, W. (2003). Financial accounting theory. Toronto, Ontario, Pearson Education,