Financial Analysis Management Task

Running Head: FINANCIAL ANALYSIS
0
Financial Statement Analysis
Nederland Consumer Products Company
(Student Details: )
1/21/2020

FINANCIAL ANALYSIS
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Answer 4.31
Based on given financial statements including income statement and balance sheet of
Nederland Consumer Products Company for the fiscal year ended September 30, 2014, ratios
have been calculated. The calculated ratios are quick ratio, current ratio, gross margin, debt
ratio, net profit margin, interest coverage, long-term debt to equity ratio, ROE and ROA.
Thus, the aforementioned ratios are presented in the below table:
Ratio calculations Formulas
2014
(Nederland
Co.)
Industry
average
Liquidity analysis Numbers
current ratio current assets 0.77 2.05
current liabilities
quick ratio CA-stock 0.57 0.78
current liabilities
Profitability analysis Percentage %
Net profit margin Net profit 12.61% 12.3%
sales
Gross profit margin
gross profit (sales-
COGS) 51.22% 23.9%
sales
Return on equity Net profit 37.51% 18.8%
total equity
Return on assets Net profit 11.36% 5.3%
Total assets
Solvency ratios times
Debt to equity ratio total debentures 0.73 0.98
total equity
Debt to total assets (debt
ratio) total debentures 0.22 0.23
total assets
Interest coverage ratio EBIT or operating 20.60 5.62

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profit
interests
While comparing the calculated ratios for Nederland Company with the industry average
ratios, it has been found that the current ratio is 0.77 and 2.05 for the firm and industry
respectively. It is a well aware fact that the higher value of the current ratio denotes that
Nederland is having the good capability to pay its short duration bills. Thus, the industry is
having a decent value of the current ratio which is much higher than the current ratio of the
chosen firm. Since the difference is too high hence Nederland Company needs to increase its
current assets in contrast to current liabilities. Besides, the quick ratio for the firm and
industry is carrying the values of 0.57 and 0.78 respectively. The interpretation of the quick
ratio suggests that it is used to calculate the most liquid assets of an organization. hence,
although Nederland is having decent quick ratio yet the firm needs to increase its current
assets as compared to stock so that quick ratio can be enhanced to fulfil the gap between the
industry and the firm’s quick ratio (ConnectAmericas, 2020).
Now switching to the gross margin value, both the firm and industry are having a gross
margin of 51.22% and 23.9% respectively. Here, the calculation of gross profit produced per
dollar of total sales has been done so that profitability can be assessed. It is clear that
Nederland is having very high gross profit margin as compared to the whole industry’s
average gross profit margin. Thus, it can be said that the firm is highly profitable within the
whole industry. In addition, the net profit margin of the firm and industry has been noted as
12.61% and 12.3% respectively. In this context, this ratio measures the management’s
capability to produce sales. As we know, the net profit margin is the measure of operating
efficiency of any firm which is almost equal for the firm and industry. Thus, the firm is
having similar as well as high operating efficiency as of the entire industry which is
appreciable.
On the other hand, the solvency ratios have been calculated for the firm and the first ratio
calculated is debt to equity ratio as 0.73 and 0.98 for the firm and industry respectively. This
ratio has measured the total amount of debt per dollar of equity for the firm and industry as
well. Thus, it is showing that Nederland Company is in a low-risk position as the ratio is less
than 1. Moreover, in terms of risk, the firm is in a better position than the whole industry. The
debt ratio is calculated as 0.22 and 0.23 for the firm and industry respectively which is almost

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the same and showing fewer risks into the business. Moreover, the interest coverage ratio
(ICR) is 20.60 and 5.62 for the firm and industry respectively. Here, the high value of ICR
for the firm is depicting the great ability of the company for meeting interest obligations. The
firm is having better ICR than the entire industry. Furthermore, the value of ROA is 11.36%
which is higher than that of the industry’s ROA; hence it is showing that the company has
efficiently utilized the assets under their command. The value of ROE for the firm is 37.51%
which is again much higher than that of the industry’s ROE as 18.8%. As there is a huge
difference in ROE and ROA for the firm hence the firm is with leverage and hence its ROE is
greater than ROA.
Answer 4.32
In this part, the firm’s financial ratio analysis has been done for the four categories and hence
performance has been evaluated. The performance evaluation will be demonstrated here in
the 4 major categories as follows:
Ratio calculations Formulas
2014
(Nederland
Co.)
Efficiency ratios
Debtors (receivables) turnover
ratio
average debtors * 365/ (cost of
sales=cost of revenue) 59.13
Creditors (payables) turnover
ratio
average creditors * 365/ sales (total
revenue) 25.68
Inventory turnover ratio
average inventory * 365/ (cost of
sales=cost of revenue) 64.05
Asset turnover ratios
Total assets turnover sales/total assets 0.90
Fixed asset turnover ratio net sales/net fixed assets 1.29
Leverage Ratios
Debt to equity ratio total debentures 0.73
total equity

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Debt to total assets total debentures 0.22
total assets
Equity Multiplier total assets/ total equity 3.30
Coverage ratios
times interest earned EBIT/Interest expenses 20.60
Cash Coverage EBITDA/Interest expenses 22.19
a. Efficiency ratios
There are three efficiency ratios include debtors turnover ratio, creditors turnover ratio,
inventory turnover ratio have been calculated for the Nederland Company. The values of the
three ratios are 59.13, 25.68 and 64.05. Here, the first two values are in appreciable numbers
where the third ratio is too high. It means from the efficiency ratio perspective, based on
(ConnectAmericas, 2020), the firm needs to work upon the inventory turnover ratio as too
high value is a warning sign for the company.
b. Asset turnover ratios
The two ratios calculated under this category are total asset turnover and fixed asset turnover
ratio as 0.90 and 1.29 respectively. When the value of the total asset turnover ratio is high
then the firm shows and efficient management while using total assets. On the other hand, a
high value of the fixed asset turnover ratio shows that the company is efficiently managing its
plant and equipment. Thus, based on (Assetratio, 2019), the firm needs to work upon its asset
turnover ratio which is good but there is a huge scope of improvement.
c. Leverage ratios
The debt to equity ratio is calculated as 0.73 whereas debt ratio is calculated as 0.22 for the
firm under leverage ratios. This ratio has measured the total amount of debt per dollar of
equity for the firm and industry as well. Thus, it is showing that Nederland Company is in a
low-risk position as the ratio is less than 1. While talking about equity multiplier, the
company is having equity multiplier value as 3.30. This value is showing the company’s
enhanced performance within the industry because values of leverage ratios are telling that

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the firm has a good number of assets for every dollar of equity. Moreover, based on
(ConnectAmericas, 2020), the firm is highly capable of leverage shareholders’ equity with
borrowed funds.
d. Coverage ratios
There are two ratios calculated under this category such as times interest earned and cash
coverage ratio. To evaluate the performance of the company in terms of times interest earned,
and cash coverage, it has been found that the firm is highly capable to meet its interest
obligations. It is because the values of the aforementioned coverage ratios are 20.60 and
22.19. Both the values are high which is clearly showing the improved capability of the firm
for meeting their interest payments and obligations in the market.

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References
Assetratio, 2019. Fixed Asset Turnover Ratio Formula. [Online] Available at:
https://www.myaccountingcourse.com/financial-ratios/fixed-asset-turnover [Accessed 2019].
ConnectAmericas, 2020. What decisions must a Financial Manager make? [Online]
Available at: https://connectamericas.com/content/what-decisions-must-financial-manager-
make [Accessed 2020].