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D’Leon Firm’s Current Financial Ratios

Introduction

To understand current financial position of the firm, or future performance, financial analysts use financial ratios. There are categories in which financial ratios can be classified. This paper will explain key categories and use D’Leon to illustrate how these ratios work.

Calculations of Financial Ratios and Their Significance

Ratios are very useful as they help managers to ascertain whether the company has enough working capital and to monitor the activities of the company. Ratios are divided in five major categories such as liquidity ratio, activity ratio, profitability ratio, gearing ratio also knows as capital structure, and investment ratio.

  • D’Leon’s 2009-estimated Current ratio is calculated as:
    • Total current asset/current liability
      • = $2680112/$1144800
      • = 2.34
  • Quick ratio is given by:
    • (Current assets – inventories) /current liability
      • = (2680112-1716480)/1144800
      • = 0.84

From the ratios calculated, D’Leon’s liquidity position is very good; the company is above the ideal liquidity position of 2:1. The company’s liquidity went down in 2008 to 1.08 ratio from 2.33 in 2007. All the companies do have an interest in liquidity ratios, they have daily obligations which they can meet only with sufficient liquid assets.

Calculation of inventory turnover, DSO, fixed asset turnover, and total assets turnover of D’Leon in 2009

  • Inventory turnover = cost of sales/average inventory
    • = 5875992/1716480
    • = 3.42 times
  • Day sale outstanding= (account receivable/total credit sales) × no. of days
    • = (878000/8133756) × 365 days
    • 39.4 times
  • Fixed asset turnover = sales/ fixed assets
    • =7035600/817040
    • =8.61 times
  • Total assets turnover = sales/ total assets
    • = 7035600/3497152
    • = 2.01 times

The projected financial position of D’Leon puts it at a better asset utilization compared to the industry’s ratios. The company has very little positive and negative deviations of the asset related ratios when compared to those of the firm. The ratios show the firm as hoarding up well against the industry.

Calculation of 2009 debt and times-interest-earned ratios

  • Debt ratio of the estimated financial position of the firm is calculated as
    • = Total liability/total asset
    • = (1544800/3497152) × 100
    • = 44, 17 %
  • Time interest earnings = Earnings before interest and tax (EBIT)/Interest expense
    • = 492648/70008
    • = 7.04 times

With a debt ratio of the company being 44.17% and that of the industry equal to 50%, the company stands a better chance to pay debts more easily. The number of earnings, according to the ratios, is far much better than the earning by an average firm in the industry. This implies that the company can easily get finances to pay for interest on debts compared to other firms in the industry.

Calculating 2009 estimated operating and profit margin, BEP, return on assets, and return on equity

  • Operating margin = operating income/ net sales
    • = (4992648/7035600) ×100
    • =7.0%
  • Profit margin = gross profit/net sales
    • = (253584/7035600) ×100
    • = 3.6%
  • Basic earnings power = EBIT/total assets
    • =492648/3497152
    • = 0.14 ×100 = 14%
  • Return on capital = EBIT/ capital employed
    • = 492648/2352352
    • =0.209 ×100= 20.9%
  • Return on equity = net profit /equity
    • = 253584/1952352
    • = 0.13 ×100 = 13.0%

The company is improving in the level of profitability, which is a positive indicator for a performing company. It is much better than an average firm in the same industry going by the ratios calculated.

Price per earnings and market per book ratio of the 2009 estimates

  • Price Earnings are given as a value of a share/ earnings of one share
    • = 12.17/1.014
    • =12.0 times
  • Market/ book ratio is calculated as price of a share/book value of a share
    • = 12.17/1.014
    • =1.71 times

The company shows that it is a good investment as it has a very low market/book value. Investors will have very high opinion on the company’s performance.

Using DuPont, ROE is shown as affected by operating efficiency, asset use efficiency, and final leverage. Going by the performance of the firm, DuPont depicts D’Leon Company as a high performing firm.

Increasing DSO from a 45.6 day to a 32 day value will raise the level of accounts receivable, while lowering the net sales value, which will increase sequentially the DSO number of times.

Inventory can be changed, and when it is adjusted, the profitability level of the firm will be stable, as finances will be held as a current asset, which can easily be converted to liquidity cash.

The poor performance by D’Leon could scare any creditor, and banks would not be comfortable in renewing the loans for fear of the firm going bankrupt. However, with the 2009 financial projections, the company looks very promising, moreover it can attract the creditor to sale with little conditions and the bank would feel safe to renew the loan.

D’Leon would not have issued large earnings as dividends because that might lead to a reduced equity funds. The company would have also taken good care of credit sales that would have transformed to bad debts. The firm would have increased liquidity funds to meet the short-term obligation such as paying suppliers.

Ratio analysis is calculated from past financial data which may not be very accurate hence may mislead. They are also very complex and cannot be understood by those who are not specialized in finance. Ratios can easily be reduced by inflation especially when computing between two periods.

The objectivity of the figures being used in the calculation is one of the areas that require qualitative analysis. The results provided especially those on profitability of the firm must be qualitatively interpreted or else they may be objective.

Conclusion

In conclusion, financial ratios can be very instrumental in explaining the financial position of the firm. Ratios can be objectively used to do financial forecasting for the firm to find whether the firm will actual improve or deteriorate in performance in future.