Income Statement
Balance Sheet
List of Ratios
Inventory Turnover
Inventory turnover is a ratio that helps to identify how quickly a company sells its products. The rate helps to determine how well the company can turn its inventory into sales and how efficient the managers are in understanding how much inventory is needed. The ratio is calculated using the formula below.
Inventory Turnover = Cost of Goods Sold / Inventory
The formula can be used to calculate the inventory turnover for 2017 and 2018.
Inventory Turnover (2017) = 120.000 ÷ 30.000 = 4
Inventory Turnover (2018) = 168.000 ÷ 25.000 = 6.72
The changes in the ratio may mean that there is a positive shift towards effective management of inventory in Super Kool Industries. The cost of goods sold during 2018 has decreased in comparison with 2017, while the end-year inventory has decreased. Since the Balance Sheet shows a significant increase in bank loans and equipment values, it seems that the company has purchased new equipment that improved the quality of the product. However, despite the positive dynamics, the inventory turnover ratio is still low. Therefore, it is recommended that changes in inventory management should occur by improving the qualifications of the current staff or hiring new managers.
Debt to Equity Ratio
The debt to equity ratio is a valuable tool for evaluating how aggressive the company is using borrowed funds for development. A high rate usually means that the company actively uses debt as a tool to improve its financial performance. The ratio is calculated using the formula below.
Debt Equity = Total Liabilities / Total Shareholders’ Equity
Therefore,
Debt Equity (2017) = 330.000 / 270.000 = 1.22
Debt Equity (2018) = 488.250 / 286.750 = 1.7
The changes in the ratio demonstrate that Super Kool Industries has decided to borrow money from a bank to improve its financial performance. The ratio has increased since the company increased its bank loan, and total liabilities have changed from 330,000 to 488,250. It can be stated that the loan improved total shareholders’ equity. However, the increase was insignificant. It is recommended that the company avoid the additional borrowings in the future and utilize the purchased equipment to pay off the debt and decrease the ratio.
Acid Test Ratio
The acid test ratio helps to understand if the company enough current assets to cover its short-term debt obligations or bills. The rate is calculated using the formula below.
Acid Test Ratio = Current Assets / Current Liabilities
Current assets and liabilities have not changed between the years. Therefore,
Acid Test Ratio (2017 ∧ 2018) = 200.000 / 200.000 = 1
The ration is perfect in both years, meaning that Super Kool Industries is an accountable organization that treats its liabilities with due caution. Therefore, the only recommendation is to maintain the stability for the company to be considered a reliable partner.
Return on Common Stockholder
Return on common stockholders is helpful for identifying how much money a person can make by investing in the company. The ratio is calculated using the formula below.
Return on Common Stockholder = Net Income / Total Shareholders’ Equity
Therefore,
Return on Common Stockholder (2017) = 75.600 / 270.000 = 0.28
Return on Common Stockholder (2018) = 62.040 / 286.750 = 0.22
The changes in the ratio show that the ratio has decreased due to reduced net income and increased total shareholder’s equity. The problem may result in issues with attracting new investors to the business. The primary recommendation is to increase income by reducing operating expenses since they have risen considerably.
Price Earnings Ratio
Price to earnings (PE) ratio demonstrates the attractiveness of stock to investors. Companies with low PE values are considered undervalued, which attracts new investors, while a high PE ratio usually indicates positive future performance. The rate is calculated using the formula below.
PE Ratio = Price / Earnings
Therefore,
PE Ratio (2017) = 250.000 / 75.600 = 3.31
PE Ratio (2018) = 250.000 / 62.040 = 4.03
The changes in earnings show that the stock price of the company is shifting towards becoming overvalued. Therefore, the company will be less attractive to investors using the PE ratio as an indicator. The recommendation is also to increase earnings or net income by reducing operation costs.
Dividend Payout Ratio
The purpose of the Dividend Payout (DP) ratio is to identify the percentage of earnings paid to the investors in the form of dividends. The ratio is calculated using the following formula:
DR Ratio = Dividends / Net Income
Where,
Dividends = Net Income – Retained Earnings
Therefore,
DR Ratio (2017) = (75.600 – 20.000) / 75.600 = 74%
DR Ratio (2018) = (62.040 – 36.750) / 62.040 = 41%
The changes show that the company offers fewer dividends to the shareholders, which may result in losing attractiveness for investors. The reason for such changes may be the intention of the company to retain more earnings to pay the interest on the increased debt. The primary way to improve financial performance in terms of the DR ratio is to increase net income by reducing operating expenses.
Accounts Receivable Turnover Ratio
Accounts receivable turnover (ART) ratio shows how many times a business can turn its accounts receivable into cash during a period. The formula for the ART ratio uses information about total credit sales. However, since the income statement does not include such information, total sales are used to estimate the number. The formula for the ART ratio is as follows:
ART Ratio = Total Sales / Accounts Receivable
Therefore,
ART Ratio (2017) = 300.000 / 130.000 = 2.3
ART Ratio (2018) = 350.000 / 120.000 = 2.92
The change in the ratio represents a positive trend towards efficient ways of collecting credit sales from customers. However, since total sales were used instead of credit sales, the changes may also mean that the company has turned to selling for cash rather than for credit. The trend in the ratio is positive, which reflects improved policies. The recommendation is to continue improving methods for collecting credit from customers by offering extensive training to the current managerial staff or hiring more competent staff.
Earnings Per Share (EPS)
EPS is calculated as a company’s profit divided by the outstanding shares of its common stock. It is an important variable for determining a share’s price. The formula for EPS is as follows:
EPS = Retained Earnings / Common Stocks
Therefore,
EPS (2017) = 20.000 / 250.000 = 0.08
EPS (2018) = 36.750 / 250.000 = 0.15
The ratio has increased since the company has chosen to retain more money for paying off debts, and the commons stocks remained unchanged. Super Kool Industries may become more attractive to investors using EPS as a primary indicator. The recommendation is to increase the retained earnings through improving the company’s performance in terms of income, rather than reducing dividends. As stated above, income can be increased by reducing operating expenses.
Book Value Per Share
Book value per share (BVPS) indicates how much money a shareholder will get in case a firm is liquidated. Since the par value is 10, the total number of shares is 25,000. The ratio is calculated using the following formula:
BVPS = Total Shareholders’ Equity / Number of Shares
Therefore,
BVPS (2017) = 270.000 / 25.000 = 10.8
BVPS (2018) = 286.750 / 25.000 = 11.47
The ratio has changed due to the increase in total shareholders’ equity in 2018. Since the company has purchased additional equipment, its total assets have grown. Moreover, the company has decreased dividends, has also improved the ration. Even though the change is positive, Super Kool Industries is recommended to decrease its liabilities by finding ways to pay off its debts.
Average Sale Period
The average sale period (ASP) shows how much time it takes for the company to sell its products. The ratio is calculated using the formula below:
ASP = (Inventory × 365 days) / Cost of Goods Sold
Therefore,
ASP (2017) = (30.000 × 365) / 120.000 = 91
ASP (2018) = (25.000 × 365) / 168.000 = 54
In other words, Super Kool Industries needed 91 days to sell its products in 2017. The company has improved the number to 54 days. ASP is closely correlated with the Inventory Turnover Ratio. Hence, it is recommended that the company continues to improve its ratio by enhancing the qualifications of its sales personnel.
Conclusion
Super Kool Industries have chosen the strategy to increase its risks and actively use debt as an instrument for improving the current financial position. The increased debt allowed the company to buy advanced equipment, which led to improvements in the quality of products. The changes have positively affected the average sale period, inventory turnover, ART ration, EPS, BVPS. However, the change has negatively affected debt to equity ratio, return on common stockholder, price earnings ratio, and dividend payout ratio, which may be associated with decreased interest from investors. However, the Acid Test demonstrates that the company can be held accountable, and the rates are predicted to improve in the following fiscal years. The drop in some of the indexes is connected to an increase in debt and reduced net income. The income is low due to high operating expenses related. The operating costs may be high due to the acquisition of new equipment. Therefore, the management of the company should focus on paying out the current debt and reducing the operating costs.