Deep Water Experts Company want to expand its retail business into the GCC countries. Before doing that, it needs to have clear picture about company’s current situation as well as its strengths and weaknesses, to determine whether the company is ready for this ambitious plan. That is why you have to conduct analysis of company’s financial ratios.
You are requested to do following things:
1. Compute all financial ratios that we have covered in the class for both 2011 and 2012 (wherever it is possible) and briefly compare the changes in company’s performance between two years, based on the provided financial statements (refer to pictures 1, 2 and 3). For the profitability and asset turnover indicators you can calculate only for year 2012, since you have income statement only for that year.
2. Using the financial ratios from the retail industry where Deep Water Experts Company belongs (sporting goods) as a benchmark (refer to picture 4), compare company’s liquidity, leverage, asset management and profitability ratios with the benchmark’s ratios (for example, company is at the median of the industry, or company is performing even better than upper quartile). Goal is to identify current standings (year 2012) of your company versus overall industry where you belong.
3. Based on your judgment and prior analysis, explain whether the company is ready for the planned expansion or not? (Give some narrative explanation why do you think company should or should not expand)
Answers
"In order to test the financial ability of a company on all fronts. The account at came up with the conecpt of financial ratios. Here are different financial ratios which are used
• Liquidity Ratios – These ratios are responsible for assessing the liquidity situation of a company. This means that the power of a company to turn it’s assets into cash is tested.
• Solvency Ratios – These ratios are responsible for testing the capacity of the company to be able to pay off all long term debts.
• Profitability Ratios – These ratios are responsible for showing the profits that the business might want while it’s business process.
• Activity Ratios – These ratios are responsible for assessing the operational efficiency of a company or business.
• Cash flow Ratios – These ratios are helping in finding the quality of the earning of the said business.
• Coverage Ratios – These ratios are responsible for assessing the inherent risk which will take place upon lending to a particular business"