Financial Statement Analysis for Blackmore Company Finance Essay

To get an understanding of Blackmore Company financial position, and what need to be done to improve its performance, some financial ratios were calculated. The liquidity ratios calculated include the current, quick asset, cash and working capital ratio. On management of debt, total debt to total asset, debt to equity, long term debt, and time interest earned and cash ratios. The activity ratio include inventory, receivable, total asset and working capital turnover. Profit margin, return on asset and equity ratio were calculated as measure of profitability, were calculated. Finally on market value measures, price earning, market share price to book value ratios together with dividend yield and payout were calculated. The conclusion and recommendations were based on the results of the financial ratio.

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Introduction

Financial ratio is the mathematical relationship between two or more element of a company’s’ financial statement. Ratio analyses are applied in the financial statement to analyze the success, failure and progress of the business. This analysis enables the business owners or manager to know the trends in the business and compare its performance and condition with the average performance of similar business in the same industry (Financial Ratio Analysis, 2010). The external users of the financial ratio include the creditors, suppliers, customers, stockholders and investors.

Ratios are classified according to the information they provide. The most frequently used ratios are Liquidity ratio, which provide information about a firm’s ability to meet its short term obligations. Activity ratios indicate how efficiently the firm utilizes its asset. Financial leverage ratio provides an indication of the long-term solvency of the firm. The success of the firm in generating profit is measured using profitability ratio. Certain problem while using the ratio is comparison between companies or industries can be difficult due to difference in worldwide standards. Although ratios are not meaningful on a standalone basis they are useful when compared with the company historical performance. This historical data do not provide direct looking information, (Financial Ratio, 2010).One can’t predict future performance based solely on these ratios since circumstance such as competitive pressure and economic condition can change quickly. Lastly, is that ratio are subject to the limitation of the accounting methods. Different accounting choices may result in different ratio values.

Liquidity ratio

Liquidity ratio measures the company ability to pay its short term obligation. The greater the coverage of liquid asset to short term obligation the better as it is clear sign that the company can pay its debt in future. Company with low coverage will raise a red flag for investor as it may be a sign that the company will have difficulty meeting its running operation and obligation. Current ratio is one of the best known measures of financial strength and the general accepted ratio is 2:1 Quick ratio a liquidity ratio is one of the best measure of liquidity (Financial ratio analysis, 2010) which concentrate on liquid asset after you have removed inventories .A ratio of 1;1 is considered satisfactory unless majority of this liquid asset is account receivables. In all the 3 years of Blackmore Company the ratio is below the accepted level. If revenue disappear the company could not meet its current obligation Working capital is more of a measure of cash flow than ratio (Financial Ratio Analysis, 2010).The result of this calculation must be positive number. Bankers look at net working capital to determine the company ability to weather financial crisis as loans is tied on this working capital. In the year 2008 the ratio was at its lowest and this shows the company can’t survive during financial crisis as it will not raise loan from banks.

DEBT MANAGEMENT /SOLVENCY RATIO

Solvency ratio indicates the extent to which the business is reliant to debt finance. Total debt ratio, compares company total debt to its asset which is used to gain a general idea as to the amount of leverage being used by the company (Engel, 1996). In the year 2007 55% of total asset was debt financed, 83% in 2008 and in 2009 is expected to be 44%.The high percentage in year 2008 shows high leverage and weak equity position. Debt -equity another measure of a company’s leverage compares the company total liabilities to the total shareholders’ equity. It measures how the suppliers, lenders and creditors have committed to the company versus the shareholders (Penwell, 1994). In the year 2007 they committed 121% what the shareholders had contributed,482% in the year 2008,and it is expected to be 79% in the year 2009.Long term debt ratio also known as capitalization ratio the debt component of the company capital structure. Blackmore Company has low level of debt ratio expectation in the year 2009 of 11% compared to the result of 25% in the year 2008 and 22% in 2007.Interest coverage ratio is used to determine how easily a company can pay interest expenses on the outstanding debt. The lower the ratio will be an indication of how the company is burdened by debt expense. In 2008 the ratio was 0.96 this raise question on the ability to meet its interest expenses

ASSET MANAGEMENT OR ACTIVITY RATIOS

Inventory Turnover= Cost of good/Inventory

Receivable turnover=Sale/account receivable

Total asset turnover=sales/total asset

Activity ratio have differing inputs and measures different segment of company overall operation performance. This gives users an insight into the company performance and management during the period. The ratio looks at how the company turns its asset to generate revenue. Fixed asset turnover measures the productivity of a company fixed asset in respect to generating sales. In 2007 it was 9.95 a decrease to 6.42 in 2008 and was expected to be 8.61 in 2009.Inventory turnover which is reported as inventory period is the number of days worth of inventory on hand is calculated by dividing inventory by average daily cost of goods sold. The more time the inventory is turned in a given operating cycle the greater the profit. In the year 2009 it was expected to be 107 days compared to 85 days in 2008 and 91 days in 2007.Receivable turnover is an indication of how quick the firm collect its account receivables. When turnover is high the collection period time will be less. In year 2007 it was 37 days,38 days in 2008 and 46 days in 2009 as the turnover decreased to 8.01 times

PROFITABILITY RATIO

Profit margin=net income/sales

Return on asset=net income/Total asset

Return on equity=Net income/total equity

The ratio measures the success of the firm at generating profit. Return on asset measures how efficiently profits are being generated from the asset employed in the business compared with the ratio of the firms in similar business (Horne & Wachowicz, 1994). In 2007 it was 5.96%Return on equity ratio tell the owner whether or not the effort put into business has been worthwhile. In 2007 it was 13.25% decreased in 2008 and is expected to increase in 2009 to 12.99%. The objectives of the profit margin analysis are to detect consistency in company earnings. Positive profit margin translates into positive investment quality (Financial ratios tutorial, 2010).Blackmore case was inconsistent in that in 2007 it was 2.56% while -2.65% in 2008 and it was expected to be 3.61%.

MARKET VALUE MEASURES

Divided yield =DPS/MPS

Dividend payout =DPS/EPS

Price Earnings ratio (P/E) MPS/EPS

Market to book ratio = MPS/Book value per share

Dividend payout ratio is an indication of how well earnings support the dividend payment (Financial ratios tutorial, 2010). In 2007 it was 25%, 6.87% in 2008 though there was a loss. In 2009 it was expected to be 21.7%Market to book ratio indicate how much shareholders are paying for every $1 asset of the company. In 2007 it was 1.28, 0.46 in 2008 and it was expected to be 1.56 in 2009.the dividend yield in 2008 was high the company made losses during the period, The price earnings ratio was negative in 2008 and it was expected to be 12 in 2009

Recommendation

To improve on the liquidity, Blackmore should pay some debt, convert noncurrent asset to current asset, put profit back to business, and increase its current from new equity contribution, loan and other borrowings with maturity of one year. Debt management ratios can be managed by the company repaying its debt or increase its equity contribution. This repayment will improve the capital structure of Blackmore and this will lead to a reduction debt expenses thus an improvement in profitability ratio. On the return to profitability, the shares price in the market will improve thus an improvement in market value measures.

Conclusion

Blackmore Company performance in 2008 was negative as confirmed by the calculated ratios. Its liquidity in 2008 was average compared to 2007.The company will still pay its short term obligation but it may strain if there is financial crisis. The company was also heavily indebted in 2008 as its total debt to equity was 4.82 and the time interest earned was 0.96 compared to 4.34 in 2007.The cash coverage was also lowest in 2008 compared to4.78 in 2007.The profitability ratio was negative since the company had acquired so much debt thus much cash was used in payment of interest. Activity ratio was okay compared to 2007 since there was no much difference in values calculated. This showed consistency in management of company resources. The market share price of Blackmore Company was low in 2008 due to the negative profit and investors did not prefer it.

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Financial Statement Analysis For Blackmore Company Finance Essay. (2017, Jun 26). Retrieved June 26, 2022 , from
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