Financial Management

This article discusses the financial management of Pamplin Inc. It includes computations of ratios, liquidity, management efficiency, financing of firm assets, and determining the stockholders return on investment.

Running head: FINANCIAL MANAGEMENT
Financial Management
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Table of Contents
Computations of Ratios:.............................................................................................................2
Liquidity of the organization:.....................................................................................................3
Management efficiency in generating operating profit:.............................................................4
Financing of firm Assets:...........................................................................................................4
Determining the stockholders return on investment:.................................................................5
Reference List:...........................................................................................................................7

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Computations of Ratios:
Ratios
Particulars 2015 2016 Formula
Current Assets 1200 1200 Current Assets
Current Liabilities 200 300 Current Liabilities
Current Ratio 6 4
Inventory Turnover
Cost of Sales 700 850 Cost of Sales
Inventory 550 625 Inventory
Inventory Turnover Ratio 1.27 1.36
Total Asset Turnover
Net Sales 1200 1450 Net Sales
Total Assets 2400 2600 Total Assets
Total Asset Turnover Ratio 0.50 0.56
Operating Profit Margin
Operating Income 250 360 Operating Profit x
100Net Sales 1200 1450 Sales
Operating Profit Margin 20.83 24.83
Operating Income Return on
Investment
Operating Income 250 360 Operating Income
Total Assets 2400 2600 Total Operating Assets
Less: Current Liabilities 200 300
Operating Assets 2200 2300
Operating Income Return on
Investment 0.11 0.16
Debt Ratio
Total Assets 2400 2600 Total Liabilities
Total Liabilities 800 900 Total Assets
Debt Ratio 0.33 0.35
Average Collection Period
Sales 1200 1450 365

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Accounts Receivable 450 425 Accounts Receivable Turnover
Accounts Receivable Turnover
2.6666
67
3.4117
65
Average Collection Period 136.88 106.98
Note: Accounts Receivable
Turnover
(Sales / Accounts Receivable)
Fixed Asset Turnover
Net Sales 1200 1450
Fixed Asset 2200 2600 Net Sales
Less Accumulated Depreciation 1000 1200
Fixed Assets - Accumulated
Depreciation
Total Fixed Asset 1200 1400
Fixed Asset Turnover Ratio 1.00 1.04
Return on Equity
Net Income 120 178 Net Income x
100Shareholders Equity 1600 1700 Shareholders’ Equity
Return on Equity Ratio 7.50 10.47
Liquidity of the organization:
Liquidity can be regarded as the ability of the company in meeting the financial
obligations when they become due (Deegan 2013). In the present situation liquid ratios such
as current ratio is computed to ascertain the liquidity of Pamplin Inc so that an understanding
regarding the organizations ability to meet the short term debts. As evident from the
computation it is found that the company reported a liquidity ratio of 6 and 4 for the financial
year of 2015 and 2016 respectively.
Though the industry norms suggest that the current ratio of an organization must be
around 1.5 but the company in the current context reported much higher current ratio both in
previous and subsequent year of 2015 and 2016. An argument can be put forward in this
regard is that the company has higher accumulated amount of working capital in the form of
accounts receivable and inventory in both the financial year of 2015 and 2016. Current assets

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represent those assets that are anticipated to be converted into cash inside the span of one
year (Williams 2014). The company could not be considered to be highly liquid since the
there is a higher instances of accumulated working capital in the form of inventory and
accounts receivable which is yet to be converted into cash.
Management efficiency in generating operating profit:
Operating profit for any organization represents the profitability of the organization
prior to taking into the considerations interest and taxes (Weil, Schipper and Francis 2013).
The operating profit margin is regarded to be an important consideration for the management
in determining the efficiency of the company. A company reporting a higher instance of
operating profit would be more considered to more profitable. As evident from the financial
figures reported by the company the operating profit margin reported by the company for the
financial year of 2015 and 2016 stood 20.83 and 24.83 respectively.
The industry norms suggest that the operating profit margin of an organization must
be around 18%. Conversely, the operating profit margin reported by the company is relatively
higher than the prescribed industry norms with figures standing 20.83 and 24.83 respectively.
This reflects that Pamplin Inc is generating sufficient amount of operating profit following
the payment of variable cost of productions. An assertion in this regard can be bought
forward by stating that the management of Pamplin Inc is generating sufficient amount of
operating profit from the assets that is employed by the organization (Beatty and Liao 2014).
With higher instance of operating profit, the company can be considered to be profitable.
Financing of firm Assets:
To ascertain the efficiency of Pamplin Inc in financing its assets total assets turnover
and fixed assets turnover is computed to understand how efficient is the organization in
financing its assets. The total asset turnover of Pamplin Inc stood 0.56 for both the financial

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year of 2015 and 2016. The industry average suggests that the total asset turnover for the
company should be around 1 but Pamplin reported a lower total asset of 0.56. An assertion
can be bought forward in this regard is that the ability of the organization to generate sales
revenue from its employed asset is relatively lower (Henderson et al. 2015). On the other
hand, fixed asset turnover ratio is computed to understand the ratio of sales in respect to the
value of fixed assets.
In the present context the fixed asset turnover ratio of Pamplin Inc for the year 2015
and 2016 stood 1.00 and 1.04 respectively. The industry norms suggest that the fixed asset
turnover to be around 1.5, whereas the company reported the figures of fixed asset turnover
which were below the industry average. A lower fixed asset turnover of Pamplin Inc suggests
that the business has not be using the assets sufficiently to generate sales and it is assumed
that the company has over-invested in plant and equipment.
Determining the stockholders return on investment:
To determine the stockholders, return for their investment the return on equity is
computed to assess the ability of the organization in generating profit from the sum invested
by their shareholders in the company (Pratt 2016). The return on equity for Pamplin Inc stood
7.50 and 10.47 for the year 2015 and 2016. The company reported a lower return on equity of
below the average industry standard of 15%. From the figures derived it can be assumed that
stockholders are not getting sufficient return for their investment as the management of the
company is not efficient in deploying the capital of the shareholders.
Conclusively, it can be stated that the organization has not made a sufficient use of the
shareholder’s capital as the profit that is generated by the company is not sufficient to provide
adequate return to the shareholders (Bodie, Kane and Marcus 2014). In other words, the
return on equity of Pamplin Inc represents that profit generated for each dollar of the

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common stockholder’s equity is below the industry standard and not sufficient for the
stockholders.

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Reference List:
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the
empirical literature. Journal of Accounting and Economics, 58(2), pp.339-383.
Bodie, Z., Kane, A. and Marcus, A.J., 2014. Investments, 10e. McGraw-Hill Education.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial
accounting. Pearson Higher Education AU.
Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.