Introduction
This paper analyzes the financial performance of a company, among which the most important ratios of liquidity, efficiency, profitability, and investment attractiveness are selected. The organization’s position is assessed as stable and sustainable; however, potential risks in the ability to cover short-term liabilities and opportunities for optimization in terms of direct non-operating costs have been identified. Despite the downward dynamics in several indicators in 2016, the general trend in 2017 is estimated as growing, except for the quick ratio; therefore, the paper identifies the potential goals of the company with an eye to financial statements.
Computations
Table 1: Computations
The quick ratio reflects the company’s liquidity, while the income indicators, gross and net margin, reflect the efficiency in terms of sales. Return on sales can be used as the leading indicator of profitability from operating costs, and, finally, ROE reflects the investment attractiveness of the brand for potential equity investments through shares. The dynamics of three years, as well as a comparison with the entire industry, can provide a comprehensive and complete analysis of the company’s current position in the market and reflect the effectiveness of internal processes over a selected period.
Comparison
The company’s liquidity has been declining noticeably for three years, but only in 2017 did it fall below the business industry standard threshold. This fact suggests that, over time, an organization is very likely to bet on long-term solvency and resilience, often reducing current assets (Sakouvogui & Shaik, 2020). On the one hand, this approach is fraught with risks, although in general, the indicator is still in a safe position; however, with proper management and the direction of free cash flows for development, this step can be justified. Current assets still significantly exceed current liabilities, and the potential decline can only be associated with some external factors since, in the dynamics of 2016-2017, the company began to rehabilitate itself in terms of net margin and return on sales.
2015 is the most successful year for the selected organization in this analysis, except for the ROS indicator, which increased markedly in 2017. The gross margin falls below the industry standard, which indicates the potential to improve the company’s financial position by looking for more profitable suppliers. At the same time, net income remains at the level of the industry, despite the fall in 2016, which reflects the well-optimized internal operating processes of the selected organization in terms of costs. This fact confirms the growth of ROS, which does not stop at the selected interval and is already one and a half times higher than the industry standard. The company does an excellent job of controlling operating costs, which keeps the net margin afloat, leaving free funds for development.
Conclusion
Prognosis
Considering the big step that the organization has taken in terms of return on equity for three years, despite falling liquidity, these conditions create an excellent reserve for further growth due to high investment attractiveness. More likely than competitors, a company will attract third-party capital inflows that can be used for horizontal or vertical expansion. Accordingly, at this point of analysis, the organization has a long-term advantage while maintaining even a small growth rate.
Accordingly, the conflict of risks caused by falling liquidity can be offset by potential capital inflows due to a high return on equity and a steadily growing return on sales. The company will likely reach its maximum in optimizing operating cost management, and further growth on this issue, given the ROS indicator exceeding one and a half times, will stagnate. At the same time, the organization has the potential to improve in terms of gross profit margin and, as a result, net profit to increase profit and percentage over the market. The goal can be achieved by reviewing several suppliers, the presented product or service line, or other management steps to restore liquidity.
Development Options
In this regard, several development options can be achieved by directing free cash flows to various growth aspects. First, the company can focus on reputational, social, and environmental responsibility issues and attract government grants (Bartolacci et al., 2020). Secondly, entering new markets can expand the sales profile, but this step is risky for liquidity, as it will require high costs in the short term. Finally, vertical development through diversification of activities, portfolio of assets, or technological development can be justified if there is a niche competitive offer over other industry representatives.
In this regard, the critical advantage is the ROE since the costs will need to be offset, which will be possible due to inflows and the high return for investors. As a result, for now, the company should focus on restoring liquidity and increasing current assets, contributing to a higher quick ratio, and optimizing the costs of goods sold to increase gross profit. Otherwise, the organization’s position is stable and relatively prosperous in the market of this industry, which creates opportunities for solving the tasks.
References
Bartolacci, F., Caputo, A., & Soverchia, M. (2020). Sustainability and financial performance of small and medium-sized enterprises: A bibliometric and systematic literature review. Business Strategy and the Environment, 29(3), 1297-1309. Web.
Sakouvogui, K., & Shaik, S. (2020). Impact of financial liquidity and solvency on cost efficiency: evidence from US banking system. Studies in Economics and Finance, 37(2), 391-410. Web.