Financial Performance Evaluation of Herbalife Using Ratio Analysis

This report provides a comprehensive analysis of Herbalife's financial performance using various financial ratios. The analysis begins by identifying the most appropriate asset management ratios (DSI, DSO, DPO) for Herbalife, considering its business operations involving inventory, credit to members, and credit from suppliers. It then compares fixed asset turnover with total asset turnover, concluding that the latter offers a broader and more helpful insight into the company's efficiency. The report further examines the importance of liquidity, coverage, and leverage ratios in assessing Herbalife's ability to meet its financial obligations. Finally, it evaluates profitability ratios (gross profit, operating profit, and net profit), emphasizing the significance of the net profit ratio for Herbalife's financial managers, as it reflects the company's ability to generate profit after all expenses. The analysis is supported by references to relevant academic literature and Herbalife's annual reports.

Running head: USING RATIO ANALYSIS TO EVALUATE FINANCIAL PERFORMANCE
Using Ratio Analysis to Evaluate Financial Performance
Name of the Student
Name of the University
Author’s Note

1USING RATIO ANALYSIS TO EVALUATE FINANCIAL PERFORMANCE
Table of Contents
Answer to Question 2......................................................................................................................2
Requirement (a)...........................................................................................................................2
Requirement (b)...........................................................................................................................2
Answer to Question 3......................................................................................................................2
Answer to Question 4......................................................................................................................3
Answer to Question 5......................................................................................................................4
References and Bibliography...........................................................................................................5

2USING RATIO ANALYSIS TO EVALUATE FINANCIAL PERFORMANCE
Answer to Question 2
Requirement (a)
DSI states how many days Herbalife would take to convert its inventory into sales. DSO
determines how much time Herbalife’s customers would take to pay the credit sales. DPO states
how much time Herbalife would take to pay off its suppliers and vendors. Inventory, accounts
receivable and accounts payable are crucial parts of the business of Herbalife (Delen, Kuzey &
Uyar, 2013). Therefore, all these three ratios are equally appropriate for using in Herbalife.
Requirement (b)
Herbalife has to maintain its inventory. It provides credits to its members as well as
importers to other countries and it also avails the opportunity of credit from its suppliers and
vendors. Therefore, all these three ratios are appropriate for the firm.

3USING RATIO ANALYSIS TO EVALUATE FINANCIAL PERFORMANCE
Answer to Question 3
Fixed asset turnover ratio only measures Herbalife’s ability to generate sales by using its
fixed assets. On the other hand, total asset turnover ratio measures the company’s ability to
produce sales by using its entire assets base that includes both fixed and current assets. In this
manner, total asset turnover ratio provides a broad insight of Herbalife’s efficiency and thus, this
would be more helpful (Delen, Kuzey & Uyar, 2013).
Answer to Question 4

4USING RATIO ANALYSIS TO EVALUATE FINANCIAL PERFORMANCE
Liquidity ratios measure whether Herbalife possesses adequate current assets and quick
assets for paying off its current business liabilities; and these ratios show whether the company
would be able to meet its obligation on not. Coverage ratios show the ability of Herbalife to meet
its financial obligation that is interest expenses on taken loans through operating income, cash
and others; and therefore, these ratios also determines the ability of the company to meet its
obligation. Lastly, leverage ratios determine the level of debt the company has currently which is
needed to determine whether the company has the ability to incur more debts in future. Since
these three categories of ratios tell about three crucial aspect of Herbalife’s ability to meet its
obligation, it is expected to use all these three types of ratios (Delen, Kuzey & Uyar, 2013).
Answer to Question 5
Gross profit ratio measure how profitable Herbalife would be to from selling its
inventory. Operating profit ratio assesses how much profit Herbalife would be left with after
paying the operating expenses. Net profit ratio measures how much profit Herbalife could make
from each dollar of sales. Therefore, all these three ratios assess the company’s profitability from
three crucial aspects. However, net profit ratio would be most helpful for the financial managers
of Herbalife because this ascertain whether the company is able to make profit after paying its
direct and operating expenses (Delen, Kuzey & Uyar, 2013).

5USING RATIO ANALYSIS TO EVALUATE FINANCIAL PERFORMANCE

6USING RATIO ANALYSIS TO EVALUATE FINANCIAL PERFORMANCE
References and Bibliography
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A
decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.
Ir.herbalife.com. (2019). Annual Report 2018. Retrieved 16 December 2019, from
https://ir.herbalife.com/static-files/8155864d-86df-4365-82c7-959a32fac511