The paper seeks to carry out a financial analysis of CanGo Limited. The results of the financial analysis will be compared with the performance of the competitors in the industry. Further, a recommendation will be made to a potential investor on whether to invest in the company or not.
The liquidity of the company is evaluated using current ratio, quick ratio, and amount of working capital. The current ratio is 2.27 while the quick ratio is1.42. The industry average is 2 for current ratio and 1 for quick ratio. Further, the company has a high and a positive value of working capital amounting to $4,7720,000.
The ratios show that the company is in a financial position to settle current obligations using quick and current assets with ease (Clarke, 2012). Also, the two ratios were higher than the industry averages. This implies that the financial strength of CanGo Limited is higher than that of the industry.
The leverage level of the company will be measured using the debt to equity ratio. The value of the ratio is 0.67. The debt to equity ratio is high and it shows that the company has a high amount of debt in the capital structure (Clarke, 2012). The industry average is 0.30. This shows that the company has a higher leverage level than that of the competitors in the industry.
Return on assets and return on sales will be used to estimate the profitability of the company. The value of return on assets was 0.02. This shows that the company can generate 0.02 sales from a unit of total assets (Brigham, & Ehrhardt, 2013). The value is quite low and it could be an indication that a large percentage of the assets held by the company are less productive. The nature of the industry can also contribute to the low value of return on asset.
The average for the competitors is 0.0132. The return on sales is 0.11. This shows that 0.11 of profit can be generated from a unit of sales. The low value can be attributed to the high cost of sales and operations. The industry average is 0.074. Thus, the return on sales for the company is higher than the industry average. The profitability level of the company is higher than that of the competitors in the same industry.
The receivable turnover ratio is 1.52 times. The ratio is low and it shows that the company is experiencing difficulties in collecting debt from clients. The industry average is 4.198. The inventory turnover ratio gives information on the number of times that a company replenishes stock within one financial year (Clarke, 2012). The value of the ratio is 0.28. The industry average is 5.29. This implies that the rate of inventory movement in the company is lower than the industry average. The overall level of efficiency of the company is lower than the industry.
Conclusion and recommendations
In summary, the financial strength of the company is higher than that of the industry as indicated by the liquidity ratios. Debt to equity ratio shows the company has a higher leverage level than competitors in the industry. Further, the company has a high profitability level. Finally, overall level of efficiency of the company is lower than the level in the industry. A potential investor should monitor the progress of the company for more time. This will allow the investor to assess whether there is an improvement in performance.
Brigham, E., & Ehrhardt, M. (2013). Financial management: Theory & practice. Massachusetts, USA: Cengage Learning.
Clarke, E. (2012). Accounting: An introduction to principles and practice. USA: Cengage Learning.