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# Liquidity Ratios: Liquidity ratios attempt to measure a company's ability to pay off its

short-term debt obligations. The analysis of these ratios is done by comparing a company's most liquid assets (those easily convertible to cash) to its short-term liabilities. So the liquidity ratios show the relationships between the firm s current assets to it s current liabilities. Current Ratio: !urrent ratio measures the number of dollars of current assets for each dollar of current liabilities. "t helps to estimate the capacity of the firm to meet its maturing obligations# Current Ratio=(Current Assets/Current Liabilities)
Square Prime 2007 1.27 1.0 2008 1.21 1.0! 2009 1.35 1.07

"t is seen that for \$rime Te%tiles Ltd.# there is a gradual decrease in current ratio from &.'( in year )''* to &.'* in the year )''+.The !urrent ratio decreases because current asset over the last three years decreases gradually followed by gradual increases in current liabilities. The decrease in current ratio tells us that the \$rime Te%tiles is degrading year by year but in comparison to them# Square Te%tiles is in a better financial position. "n case of Square Te%tiles# current ratio increases from &.)* in the year )''* to &.,- in the year )''+ with a downfall in the year )''( with a current ratio of &.)*. The standard deviation for current ratio is ).&. /n an average over the last three years# current ratio for Square Te%tiles is &.)( times than whereas current ratio for \$rime Te%tiles on an average is &.'*. So both the company s are standing at the same line and needs to better off their position. 0ut since \$rime Te%tile s ration is gradually decreasing# it needs to overcome it# whereas Square Te%tiles is in the upward position. This may have happened due the reduction of the number of 1ebtor s and due to an increase in the number of

creditors of Square Te%tiles# which has helped it to be in a better position# though \$rime Te%tiles is not very far behind. Quick Ratio: The quic2 ratio or the acid-test ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quic2 ratio e%cludes inventory and other current assets# which are more difficult to turn into cash.

(Current Asset – Inventories) / Current Liabilities

Square Prime

2007 0."2 0.!!

2008 0.7! 0.#"

2009 0."! 0.3"

Interpretation: "n case of Square Te%tiles# there is a gradual increase in quic2 ratio from '.+) times in year )''* to '.+3 times in the year )''+# with a downfall of '.*3 in the year )''(. The increase in quic2 ratio is because the company s current asset e%cluding the inventories are increasing gradually even though there is a gradual decrease in liabilities from year )''* to year )''+. The increase in quic2 ratio is quite favorable for the company. 4ote that# even if the inventory level is highest in )''( compared to )''* and )''+# the difference between current asset and inventory is increasing gradually along with decrease in current liabilities for which quic2 ratio shows a gradual increase. This tells that Square Te%tiles is able to meet its financial obligations out of current liquid assets. "n case of \$rime Te%tiles# quic2 ratio decreases from '.33 in the year )''*

This might have occurred because a larger amount of the total assets is used to cover the current assets.to '. "n comparison to \$rime Te%tiles# 6uic2 ratio is better for Square Te%tiles# which is on average '.(((a little less than the benchmar2) whereas \$rime Te%tiles has a quic2 ratio of about '. The benchmar2 for quic2 ratio is &. "t helps to analy8e capital intensity as well as corporate liquidity.&. Sufficient wor2ing capital provides assurance to short-term creditors that they will be paid by the company as soon as possible..-& over the last three years. . Net Working Capital: 7or2ing !apital measures the percentage of total assets that is invested in current assets. 47!9Current Asset/ Total Asset 2007 ##!\$"23\$#1 2 55\$7!3\$1#0 2008 5"3\$7" \$ 5 # !1\$"22\$2" 2009 35\$ 51\$#21 57\$501\$ 53 Square Prime Interpretation: :rom the analysis done# Square Te%tiles is in a much better position to pay off it short time liabilities in comparison to \$rime Te%tiles which is falling much behind.+ in )''+. This tells us that \$rime Te%tiles has lots of wor2 in progress# or unsold products which have caused its inventory to be high.5+ in the year )''( and to '.

50 Interpretation: "n the year )''+# T. The :i%ed <sset Turnover =atio for Square Te%tiles shows an increase from &.2" 1. The data analysis hence indicates that Square te%tiles has a better position in terms of :i%ed <sset Turnover."! 2008 1.*' in the year )''+ with a downfall of &.-' in )''+. "n the year )''+ T.!2 0. Square Prime 2007 1.'' from )''* to )''( but a downfall of '.3) in the year )''* to &. .*'. & worth of fi%ed asset of Square Te%tiles can generate a sale of T.+3 to &.-'. There has been an increase from '. &. This may have happened because of the rapid decrease in sales in lac2 of generating net fi%ed assets.00 2009 1.70 0. & worth of fi%ed asset of \$rime Te%tiles can generate a sale of T. '. :i%ed <sset Turnover ratio decreased from )''* to )''( due to the rapid decrease in sales in lac2 of generating net fi%ed asset but from )''( to )''+ fi%ed asset turnover ratio increased due to the rapid increase in sales for generating net fi%ed asset.)+ in )''(.Productivity Ratios Fixed Asset Turnover% &i'e( Assets )urno*er=Sales/+et &i'e( Assets The fi%ed asset turnover means how much of sales have been generated by using the fi%ed assets.

53 0. The data analysis shows that Square Te%tiles has a better total asset turnover than \$rime Te%tiles. Total <sset Turnover evaluates the efficiency of managing all of the company's assets. '.Total Asset Turnover: The total asset turnover(T<T/) illustrates how much of sales have been generated from the total assets used. 7hereas# \$rime Te%tile s Total asset turnover decreases from '. .3* in year )''* to '. in the year )''(.*' worth of sales in case of Square Te%tiles. This is because> sales were high in the year )''+ in comparison to )''* and )''(# the increase in sales accompanied by a upgrade in total asset has caused the total asset turnover to improve drastically in )''+ from )''(.!7 2008 0. The decrease in total sales followed by decrease in total asset has caused negligible change in turnover. "n the year )''+# every T.!0 2009 0. & worth of asset is generating T.!" 0. The Total <sset Turnover increases from '.-. Inventory Turnover Ratio The ratio is regarded as a test of ?fficiency and indicates the rapidity with which company can move its merchandise.*' in the year )''+ but falls slightly to '. Total Asset turnover: Sales / Total Asset 2007 0.3' in the year )''( and falls drastically .37 Square Prime "nterpretation.70 0.3+ in year )''* to '.

times in the year )''* to &').30 2009 102. The data analysis shows that \$rime Te%tiles has a better inventory turnover than Square Te%tiles. Days’ Sales Outstanding The 1ays Sales /utstanding ratio shows both the average time it . times in the year )''+ in case of Square Te%tiles. This indicates that cost of goods sold has decreased gradually and number of inventory in the warehouse has increased in )''+." 2008 17 . Square Te%tiles has not sold and stoc2ed its inventory more which is unfavorable.*.55 71.73 1# .73 177.!0 Square Prime Interpretation: There is a gradual decrease in inventory turnover from &'*.Inventory Turnover: Cost of goods sold/ Inventory 2007 107.+( times to &**. \$rime Te%tile s inventory turnover increases from *&. The reason behind this is increase in cost of goods sold from )''* to )''+.3' times in the year )''* to )''+.-.

2! 57. This ratio is of particular importance to credit and collection associates.3 2008 202.ta2es to turn the receivables into cash i.-* days in )''+# which is favorable for \$rime Te%tiles.3* days in the year )''* to &-(. how much time it ta2es to collect money from collectors and the age# in terms of days# of a company's accounts receivable..03 2009 15 .57 Square Prime Interpretation: The days sale outstanding for Square Te%tiles increases gradually from &&*.( days in the year )''* to -*.)3 days in the year )''+ which is a very bad sign. Days Sales Outstanding: e!eivables/ (Annual Sales/"#\$) 2007 117. This tells us that Square Te%tiles has worsen its credit sales collection over the last three years. @owever# \$rime Te%tile s 1ays Sales /utstanding shows a steady decrease from *).!7 72.0! 7 .e. Leverage Total De t to Total Asset The debt-to-asset ratio tells us how much of the total assets are . "t shows that \$rime Te%tiles is able to collect its receivables more effectively than that of Square Te%tiles.

e.. "nterpretation.*+A in the year )''* to 5.25. were financed by debt. .37. '. for every T. Debt to Asset atio: Total Liability/ Total Asset Square Prime 2007 ##.5. 2009 #3. 3#. & of asset# T."5.+&A in the year )''+. & of asset# T. /n the other hand# in the year )''+# \$rime Te%tile s .financed by the overall liability of the company. 2008 # .. 5!.7". @ence# \$rime Te%tiles with lower debt to asset ratio is in a favorable position than Square Te%tiles from the view point of creditors# because lower the debt ratio# the greater the cushion against creditor s losses in the event of ban2ruptcy.3". "n the year )''+# Square Te%tile s 5.. 53. '.*A in the year )''+..5.*A of total asset were financed by debt i.5."1..e. /n the other hand# in case of \$rime Te%tiles# debt to asset ratio falls gradually from -. for every T.)-A in the year )''* to ..+&A of total asset were financed by debt i.. The debt to asset ratio for Square Te%tiles shows a slight decrease from 55.were financed by debt.

This is a measurement of how much suppliers# lenders# creditors and obligors have committed to the company versus what the shareholders have committed. 113. The data analysis suggests that \$rime Te%tiles has a lower debt to equity ratio compared to Square Te%tiles which is quite favorable for \$rime Te%tiles..3.A in the year )''+. The lower the ratio# the more the company is burdened by debt e%pense.+)A in the year )''* to -. "nterpretation. This is because increasing debts are financed by increasing equity.!3. This is because debt is decreasing gradually year by year and lower debts are financed by increasing equity.5 . 53.De t!"#uity Ratio The debt-to-equity ratio is a leverage ratio that compares a company's total liabilities to its total shareholders' equity. 12". Debt to %&uity: Total Debt / S'are'older(s %&uity Square Prime 2007 1. 2008 "5. 2009 7!.32. \$rime Te%tile s debt to equity ratio decreases gradually from &&. Ti\$es Interest "arned%TI"& Ratio The interest coverage ratio is used to determine how easily a company can pay interest e%penses on outstanding debt.&&A in the year )''* to *3..-(A in the year )''+.11."2."1. "n case of Square Te%tiles# 1ebt to ?quity ratio decreases from (&. Ti)es Interest %arned: %arnings before Interest and In!o)e Ta*es / Interest C'arges .

!! 2009 3. fro) operation / Total Debt . Square Te%tile s T"? ratio decreases gradually from 5. Cas' (lo) to De t Ratio This ratio measures how long it would ta2e the company to pay off a firm s debt.53 2.Square Prime 2007 #. The reason behind this is that Summit \$ower has larger amounts of debt and long term loans and the increasing debt as well as more long term loans causes the interest charges to increase# thus decreasing the T"? ratio. Boreover# T"? ratio for \$rime Te%tile s increases from )..21 2008 3.-3 times has a greater margin of safety than \$rime Te%tiles with T"? ratio of &.)& in year )''* to ).3& times in year )''+. <fter the analysis# it is seen that Square Te%tiles with T"? ratio 'f .!1 "nterpretation.(( times in the year )''* to . Cas' +lo. 2.33 in year )''( and falls drastically to &. The reason behind this fluctuation is because interest e%pense falls.5! 1.3& times which tells us that Square Te%tiles can meet its annual interest cost with operating income. to Debt atio: Cas' flo..-3 times in the year )''+.

!" 2009 5.!3 "nterpretation.1! 1. \$rime Te%tiles# on the other hand# has a cash flow to debt ratio of ). -rofitability atios: \$rofitability ratios distinguish the different measures of corporate profitability and financial performance.3.17 2. in )''+.&* in year )''* to -. # 2. The data analysis suggests that Square Te%tiles is in a better position to cover its debt from operating activities whereas \$rime Te%tiles has a higher amount of debt# also they have a high 1ebt ratio# in regards to their 1ebt their operating cash flow has not increase that much# hence this has caused a Lower T"?.2# 2008 #. This is because over the last three years# amount of debt has increased followed by decrease in cash flow from operations# thus causing the cash flow to debt ratio to decrease.)5 in the year )''*# followed by a improvement in of ). The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. .&3 in the year )''+.Square Prime 2007 !. These ratios give a good understanding of how well the company utili8ed its resources in generating profit and shareholder s value. "t is these ratios that can give insight into the all important CprofitC.3+ in )''( and then a gradual decrease of &. The fall in cash flow to debt ratio is due to the fact that Square Te%tiles is increasing debt over the last three years. "n case of Square Te%tiles# !ash flow to debt ratio decreases from 3.

The drastic change in Dross \$rofit margin for power grid can be accounted for the increase in sales. sales E cost of goods sold) decreases from )''* to )''( but then in the year )''+# gross profit increases due to the decrease in cost of goods sold compared to increase in sales. 2009 13.()A in the year )''+# with a downfall of &&. 2. 10. Net +ro(it . < higher margin percentage is a favorable profit indicator .*ross +ro(it . 11. /n the other hand# Dross \$rofit margin for \$rime Te%tiles increases gradually from &'.*5A in the year )''+. The fluctuations occur because gross profit (i.A to &-.7#.1 .12. 2.oods sold) /sales 2007 22. 2008 15.+.()A in )''(.argin "nvestors can easily see from a complete profit margin analysis that there are . The data analysis reveals that in )''+# Square Te%tiles has a better position than \$rime Te%tiles in terms of Dross profit margin because the higher the gross profit margin# the more efficiently a company is using its direct materials# direct labor and manufacturingrelated fi%ed assets to generate profits.&(A in the year )''* to )''( and then decreases to &."3. The Dross \$rofit margin for Square Te%tiles decreases from )).ross -rofit /argin: (Sales 0 Cost of .&)A in )''* to &).e.argin: The gross profit margin is used to analy8e how efficiently a company is using its raw materials# labor and manufacturing-related fi%ed assets to generate profits. Square Prime "nterpretation.. 12.

7.*-A and then falls slightly to 3. 1et -rofit /argin: 1et in!o)e / Sales 2007 13.-'A in )''( due to increase in net income generated by higher sales and then falls to ).!7. !. 2009 .The 4et \$rofit Bargin for Square Te%tiles decreases from &. The main reason behind the profit margin decline in )''+ is high cost that occurs as a result of inefficient operations." .75.. Square Prime "nterpretation.. 2008 7. Denerally# the higher the return# the better it is for the owners..*&A. 1.35.7". #. eturn On %&uity: 1et In!o)e / Total Co))on %&uity 2007 17.##.several income and e%pense operating elements in an income statement that determine a net profit margin.20. 2008 7."5. "t allows investors to ta2e a comprehensive loo2 at a company's profit margins on a systematic basis.(*A in year )''* to *.+-A in )''+ due to increase in costs. #. 2009 !. 2. Return on "#uity The return on common equity measures the return earned on the common stoc2holders investment in the firm. The data analysis shows that Square Te%tiles has maintain a favorable profit margin as they managed their operations efficiently.-A in )''* to 5.71.3!. Square Prime . 3.50. Similarly# \$rime Te%tile s net profit margin increases from .

2#. .0".)'A in )''( due to massive increase in net profit after sales# causing the =/? to increase. 2..*+A to 3.!3. 2. eturn on Asset: 1et In!o)e / Total Asset Square Prime 2007 ". 2009 #. This is because of the steady increase in common shareholder s equity. The =/? for \$rime Te%tiles# on the other hand# increases from 5.73.55A in )''*# going drastically down in )''( with *.70. Return on Asset The =eturn on Total <ssets# also called return on investment measures the overall effectiveness of management in generating profits with its available assets.3A. 2008 #. <ccording to the data analysis# Square Te%tiles has a better =/? in )''+ compared to \$rime Te%tiles so Square Te%tiles is more favorable. The higher the firm s return on total assets# the better it is considered.Interpretation: :rom )''* to )''+# Square Te%tiles shows a gradual decrease on =/?# with &*.+(A and then a slight upward curve in )''+ with (. 1.07. 0ut in )''+# total equity falls followed by decrease in net profit after sales# thus causing the =/? to decrease drastically.

#1 2009 2."nterpretation.3.arket to -ook Ratio.A is in a more favorable position compared to \$rime Te%tiles with a return on asset of &. The Bar2et to 0oo2 value of the share compares the boo2 value of the share which is the internal or face value of the share with the mar2et price of the share.52 0. Boreover# return on total asset for \$rime Te%tiles increases from ).'+A in )''+. 7hen loo2ing at the financial statements of a company# many users can suffer from information overload as there are so many different financial values. The data analysis reveals that Square Te%tiles with a higher return on asset ratio of 5. /ar2et to 4oo2 3alue atio: /ar2et -ri!e per S'are / 4oo2 3alue per S'are 2007 2. /ar2et 3alue atios The Bar2et Falue ratios attempt to simplify the evaluation process by comparing relevant data that help users gain an estimate of valuation.*. The reason for the change is because the net profit after ta% increases by a significant amount from )''*-)''( but falls rapidly in )''+ followed by steady increase in total asset over last three years.*. The return on total asset for Square Te%tiles decreases from +." 0.A in the year )''* to 5.A in )''+.)5A in )''* to ). Stoc2 Bar2et ratios help to evaluate easily.'+A.*' A in )''( but falls rapidly to &. .31 Square Prime . This means that Square Te%tiles is using its assets more effectively and efficiently in comparison to \$rime Te%tiles.1 2008 1." 0. The reason for the change is because the net profit after ta% decreases by a significant amount from )''*)''( but improves slightly in )''+.'*A in )''( but improves slightly to 5.

& of Square Te%tile s boo2 value than T. This is due to the increase in mar2et price followed by decrease in boo2 value per share over the last three years.-( in )''+ due to increase in mar2et price per share. +rice!"arnings Ratio The priceGearnings (\$G?) ratio is the best 2nown of the investment valuation indicators. & of \$rime Te%tile s boo2 value. <ccording to data analysis# Square Te%tiles is in a favorable position with higher mar2et to boo2 ratio as investor are willing to pay more for a T. -ri!e %arnings atio: /ar2et -ri!e per S'are / %arnings per S'are .Interpretation: The Bar2et to 0oo2 ratio for Square Te%tiles decreases from ). "n case of \$rime Te%tiles# mar2et to boo2 ratio increases steadily from '.+( in )''* to &.5& times in year )''*-)''+. The \$G? ratio has its imperfections# but it is nevertheless the most widely reported and used valuation by investment professionals and the investing public.&( times to '.+( in )''( because of decrease in mar2et price per share by significant amount in )''*-)''( but increases to ).

&' in )''* to )5.Square Prime 2007 17.10 3. in year )''+ due to decrease in mar2et price per share. Price to Cash Flow Ratio Square Prime 2007 12..-+ in )''*-)''( due to significant increase in mar2et price per share and then it increases to &(. The data analysis reveals that Square Te%tiles has higher earnings per share ratio over the last three years compared to \$rime Te%tiles. ! 2008 2#.'.#5 2009 17.5 "nterpretation.5" 2009 30.23 1 .7# 2008 15.(5 in )''( due to significant increase in mar2et price per share and then again increases significantly to .2" 17.#3 !."! . The price earnings ratio for \$rime Te%tile s increases from .(3 to 3.). # !.-( in )''+ due to slight decrease in earnings per share.33 3. Square Te%tile s price earnings ratio increases from &*. This tells us that \$rime Te%tiles is much ris2ier than Square Te%tiles and might have poorer growth prospects.

55 Du+ont Syste\$ The 1u\$ont system provides a good starting point for any financial analysis.37 0. 7henever we are presented with financial statements# it is important that we loo2 at a . "t shows the financial strength that comes from many sources (profitability5 asset utili6ation5 leverage).13 2008 1.Price-Sales Ratio Square Prime 2007 2. "t reinforces the concept that good financial analysis requires loo2ing at each ratio in the conte%t of the other."2 0.03 0.30 2009 2.

2#.!3 1. #.3#.er . 1.0 .5.2 0.71. =/? 9 (4"GSales) % (SalesGT<) % (T<G?quity) The following chart shows the 1u\$ont of Summit \$ower and \$ower Drid for the year )''*-'+- Du-ont for Su))it -o. "t can be calculated using the following formula. .#2 Du-ont for -o. 23. 27. 2 .31 0.30 2. 0.er: Extended Du-Pont Equation 2007 2008 2009 Return on Equity Net Profit argin !ota" #sset !urnover Equity u"ti\$"ier 1".sample of ratios from each maHor category to identify areas of strength and wea2ness.rid: Extended Du-Pont Equation 2007 Return on Equity Net Profit argin !ota" #sset !urnover Equity u"ti\$"ier 12."0 1#.#2 .7#.11 #. 12.

10. t'e) to gain a stronger li&uidity ratio t'en t'ey 'ave no.7 . This suggests that debts are decreasing gradually and the less number of debts are financed with increasing equity. &. This tells that \$ower Drid is more debt financed.10 #. So we can tell that \$ower Drid has a better liquidity position than Summit \$ower.ill allo.1!. The higher =/? for Summit \$ower can be accounted for its higher profit margin and higher total turnover ratio compared to \$ower Drid. • • • "n )''+# \$ower Drid has a better current ratio# wor2ing capital ratio and acid test ratio compared to \$ower Drid. 27.13 "nterpretation.3#.on average which is greater than that of Summit \$ower (&. 31.'i!' .+( on an average). .2008 2009 13. 11. It is advisable to Su))it -o.10 . Boreover# over the period of last three years# \$ower Drid has an equity multiplier of 5. Liquidity ratio. !onclusion.). "t should be noted over the last three years# equity multiplier for Summit power decreases drastically.20 #. The data analysis indicates that in )''+# Summit \$ower is in a much better position than power Drid with higher =/?.03.er to redu!e its !reditors and t'ey s'ould try to in!rease t'eir Debtors .

. • • • • • Summit \$ower has greater receivable turnover ratio and lower days sales outstanding compared to \$ower Drid in )''+ which is considered as favorable. • • • "t is seen that Summit \$ower and \$ower Drid has similar 4et \$rofit Bargin.). <sset management ratio . \$rofitability ratio. Leverage ratio. . Summit \$ower has better =/<# =/? and Dross \$rofit Bargin "n short# Summit \$ower has better profitability position compared to \$ower Drid. Stoc2 Bar2et ratio. 5. • • • "n )''+# Summit \$ower has a lower debt to asset and lower debt to equity ratio compared to \$ower Drid which is quite favorable. Boreover# summit \$ower has greater cash flow to debt ratio as well as greater T"? ratio in the year )''+ in comparison to \$ower Drid.. -. @ence Summit \$ower has better leverage position than \$ower Drid and hence a greater margin of safety. Summit \$ower has a better total asset turnover and fi%ed asset turnover compared to \$ower Drid in )''+. \$ower Drid has a better inventory turnover ratio than Summit \$ower in )''+. @owever it is advisable for Summit \$ower to increase its inventory turnover for a higher performance. /verall# Summit \$ower is in a more favorable position than \$ower Drid.

Summit \$ower is in a good mar2et value position.Summit \$ower is in a favorable debt management position and is less ris2y. • /verview. Summit \$ower needs to focus on its boo2 value per share ratio and can improve it by increasing share holder s equity.Summit \$ower is in a good <sset management position. . \$rofitability. 1ebt management. ). . Liquidity. 7e can conclude that Summit \$ower has a quite favorable stoc2 mar2et ratio.Summit \$ower has good \$rofitability position.• • • Summit \$ower has a greater Bar2et to 0oo2 value ratio and higher \$rice to earnings ratio compared to \$ower Drid so it is quite positive in )''+. Summit \$ower# compared to \$ower Drid# has a lower boo2 value per share# lower ?arnings per share# and lower dividend payout ratio. Bar2et value. "t also needs to focus on earnings per share for better performance. <sset management.. -. 5.Summit \$ower is in a poor liquidity position. &.