Analysis of income statement
A review of the income statement of Whirlpool Corporation between the year 2010 and 2014 shows that the performance improved. Revenue grew by 8.20%, while gross profit rose by 25.06%. The high growth in gross profit can be attributed to the low growth in cost of revenue. The total operating expense rose by 29.37%, while operating income increased by 17.86%. Further, it can be observed that the operating income fluctuated significantly during the period. This indicated that the company is facing difficulties in generating profit from the main operating activities. Interest expense grew by 36.44%, while income before taxes rose by 50.34%. The results further show that there was a significant increase in provision for income taxes. The resulting net income grew by 5.01%. A review of the income statement shows that the expenses grew at a higher rate than revenue and income. This indicates that there is a need to manage the expenses (Hansen, Mowen and Guan 201).
Ratio analysis
The ratios presented in the attached file represent five aspects of financial performance of the company. The first aspect is profitability. The trend of the two ratios was volatile. The company had a decline in profitability in the year 2011, 2012, and 2014. Further, return on assets was low (Collier 171). It indicates that the amount of profit that is generated from a unit of fixed asset was low. Return on equity also fluctuated significantly. It indicates that the shareholders cannot predict the amount of returns they can receive from their investments. The liquidity ratios as indicated by current and quick ratios deteriorated over the period (Deegan 141). Current ratio dropped from 1.19 in 2010 to 0.96 in 2014 with a slight increase in 2012. A similar trend was observed in the case of quick ratio. Further, it can be noted that the liquidity ratios were low. This indicates that the company may face difficulties in meeting short term obligations. It also shows that the company is facing difficulties in working capital management.
Leverage ratios focuses on the amount of debt in the capital structure of the company. The debt to equity ratio fluctuated during the period. The company reported a decline in the value of the ratio between 2010 and 2013. However, in 2014 there was a significant increase in the value of the ratio. This implies that the amount of debt in the capital structure increased. A high amount of debt reduces profitability. The interest coverage ratio, which measures solvency, fluctuated during the period. This can be attributed to the volatility in the amount of debt and operating profit. The ratio shows that the company was insolvent during some years. The efficiency ratios, which focus on the level of activity, fluctuated during the period (McLaney and Atrill 203).
An upward trend was observed in the values of receivables and inventory turnover. This indicates an improved efficiency in collecting accounts receivables and sale of stock. However, the asset turnover dropped in 2014. This shows that the assets are underutilized or they are dilapidated. Therefore, the fluctuation in the profitability ratios can partly be attributed to the volatility in efficiency ratios. There was an upward trend observed in the values of price-to-earnings ratio over the period. Despite the fluctuations recorded in some years, shareholders of the company should expect higher returns in the future as indicated by the trend (Brigham and Ehrhardt 198).
SWOT analysis
Strength
- In terms of revenue, the company is one of the major global players in the industry.
- The company has a large market share and an ability to operate across the globe.
- Valuation ratios indicate that the company is likely to perform better in the future.
Weaknesses
- The company lacks penetration strategy into new markets.
- The data for revenue shows that a significant proportion of revenue is generated from one region, that is, North America.
- The company is losing market share in some regions. This affects the revenue generated from these regions.
Opportunities
- Recovery of the housing market in most of its markets increases consumption of its products.
- Ability to arrange capital either through debt or equity financing.
- Increase in consumption of home appliances worldwide.
Threats
- Slow rate of growth in the amount of revenue.
- Fluctuating and low values of operating profit and net profit margin.
- Increase in the cost of raw materials.
Questions to the finance director
- What is the company’s future financial goal?
- What measures are put in place to reduce the operating costs of the company?
- How effective are the strategies put in place to turn around the current volatility experienced in the financial results?
- What is the future investment plan for the company?
Difficulties
First, the operations of the companies cut across several industries. Therefore, it was possible to come up with ratios for these numerous divisions. Thus, a single ratio for the entire company may not represent all the divisions. Secondly, inflation distorts the values reported in the financial statements, especially the balance sheet. Therefore, the book values are often different from the market values. Further, it is hard to come up with a broad decision on whether a ratio is satisfactory or unfavorable. This makes it difficult to draw a conclusion on the overall performance of the company (Arnold 68).
Works Cited
Arnold, Glen. Corporate Financial Management, UK: Financial Times/Prentice Hall, 2007. Print.
Brigham, Eugene and Ehrhardt Michael. Financial Management Theory and Practice, USA: South-Western Cengage Learning, 2009. Print.
Collier, Peter. Accounting for Managers, London: John Wiley & Sons Ltd, 2009. Print.
Deegan, Craig. Financial Accounting Theory, London: McGraw-Hill, 2009. Print.
Hansen, Don, Maryanne Mowen and Liming Guan. Cost Management: Accounting & Control, USA: South Western Cengage Learning, 2009. Print.
McLaney, Evans, and Peter Atrill. Financial Accounting for Decision Makers, London: Financial Times Prentice Hall, 2008. Print.