Executive Summary
After carrying out an audit of ratio analysis of HJ HEINS, a number of inferences can be drawn. The firm is operating profitably as the profitability ratios surpass the industrial average, and the trend is declining. The company, however, is not financially stable owing to its low current, quick, and debt ratios. On the other hand, it is effectively utilizing its assets to generate sales revenue. It has high inventory and accounts receivable turnovers, which may be high than the trend looks up toward a dangerous point.
The management ought to improve the profitability, performance, activity, debt-paying ability, and liquidity through a cost reduction mechanism, adoption of a favorable credit policy, and a sound financing policy. They also need to invest in projects that generate positive net present values for the benefit of the shareholders.
Introduction
This report is based on financial ratio analysis is aimed at measuring the general performance of the company. The ratios would help users to get an in-depth understanding of the company’s profitability, capital structure, financing policies, financial stability, and efficiency with which it is utilizing its assets to generate sales revenue. For the management, their objective would be on how to improve on poor areas and maintain good performance. Its intended users are the management of the company, customers, employees, and the government, who would use it for taxation other regulatory purposes. The sources of the ratios used have been provided in excel, which is in the appendix, i.e., the Profit and loss accounts and the balance sheets of the past four years.
Financial analysis report
On profitability/ performance, it can be noted that the profitability of the HJ Heins is declining over time. This is shown by the Gross profit margin ratio, Return on Assets (ROA), Return on Equity (ROE), and the operating profit margin ratio. In 2005, the ROE declined to 0.425 from 0.472 in 2004 before declining further to 0.289 in 2006 before going up to 0.315 in 2007. The net profit margin ratio also inclined to 0.164 in 2005 from 0.143 in 2004. In 2006, it declined to 0.158 and then 0.129 in 2007. In 2005, the ROA inclined to 0.081 from 0.061 in 2004 before declining further to 0.071 in 2006 before going down to 0.066 in 2007. The Gross profit margin ratio also inclined to 0.367 in 2005 from 0.356 in 2004. In 2006, it inclined to 0.374 and before coming down to 0.358 in 2007. Even though the profitability of the company has been fluctuating, it is still positive results, but if the management does not take care, it will be worse.
Liquidity and debt-paying ability, the current ratio indicates that the firm is financially stable and liquid with a ratio of 1.34:1, 1.409:1,1.462:1, and 1.705:1 for years 2007backward to 2004.from the trend it shows that the stability was coming down. This means that for every $1 of current liability, there are more than $1 of current Assets. The recommended ratio is 0.5:1, i.e., current assets should be twice as much as current liabilities.
The quick Asset Acid test ratio also declines from 1.107:1 in 2004 to 0.994:1 in 2005, to 0.923:1 in 2006, and 0.808:1in 2007. The ratio indicates how able the firm is in meeting its financial obligations from the most liquid assets. From the quick and acid test ratio, one is able to know that most stocks were held in large quantities. The ability of the firm to pay liabilities was coming down, as it is shown by times interest earned and the amounts of cash flows that were being held. The time’s interest earned fluctuated as 5.251, 6.511, 5.52 and 3.521for years 2004, 2005, 2006 and 2007 respectively.
There is no improvement of the debt/equity ratio it keeps on fluctuating that is 6.693:1, 4.214:1, 3.064:1, and 3.753:1 in years 2004 to 2007, respectively. This ratio is an indicator of how many times the shareholder’s funds can pay total liabilities. From this, I deduce that on average, for every $3 of debtors, they will get $1 from the shareholder’s funds. This trend is very dangerous as the bankruptcy risk is high. If the company commits a technical default and creditors decide to go to court, then the company will go under. The debt/assets ratio has also shown a downward trend except for a small improvement in the year 2007.the ratio was 0.87, 0.81, 0.75 and 0.79 for years 2004 to 2007 respectively.
The ratio of current liabilities to total liabilities was declining to mean that the company was changing her policies that are shifting to financing using long-term debt. the ratios were as follows 0.0.1:1, 0.088:1, 0.122:1 and 0.012:1 for years 2004 to 2007 respectively.
The rate at which the HJ Heinz converts inventory into cash is decreasing over the years except the year 2006 when it went up. As shown by the inventory turnover ratio, the number of times that stock was turned to sales, i.e., the ‘buy and sell’ frequency, was 5.2 times in 2007. This was to 4.6 times in 2004, then 4.6 times in 2005 and 2006 recorded the lowest performance of 4.0 times. It means that the efficiency with which the firm is utilizing its stock to generate sales revenue is high and improving over time.
However, activity with regard to debtors (accounts receivable) shows a haphazard performance, with improvements being interchanged with poor performance. It was only in 2007 and 2005 when the company recorded a high accounts receivable turnover of 8.6 times and 7.7 times respectively. Even though the turnover rates in 2004 and 2006 were lower at 7.4 times and 7.1times respectively. The account receivable came down from 51.2 to a low of 42.3 in 2007. this shows that the company had improved in its collection policy.
Conclusion
In order to achieve better future results, better or close to industrial average, the firm needs to cut down its operating expenses. This would considerably improve the profitability ratios. They also have to review their policy on capital management and keep optimal levels of various items of current assets. This would improve the firm’s liquidity position. In order to improve the return on owner’s equity ratio, the management should invest in viable projects that would yield a positive NPV. This has the effect of maximizing their wealth. To improve on the financial ratios, the firm would ensure that it has more liquid assets and also resort to internal sources of finance as opposed to external ones.
References
- Richard Sanzo, Ratio Analysis for small Business, Yale University Publishers, 2005 USA.
- Charles Givens, More Wealth without Risk, Mc GrawHill, 2002 USA
- Charles Vandyck, Financial ratio analysis, Wiley books, 2006, USA