R Ro og ge el li io o Y Y. . S Sa al li ip po ot t, , O Ol li iv ve er r A A. . J Ja av vi ie er r, , a an nd d A At tt ty y. . D De en nn ni is s O O. . G Go o, , J JD D, , E En nP P June 29, 2014
Current ratio Current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. While the data above shows that Foodrich's current ratio is above the industry average, thus making Foodrich more liquid than its competitors, it may also mean that Foodrich is not efficient in utilizing its asset. It may mean that Foodrich has too much idle assets or cash which can be put into productive use. Quick Ratio / Acid test ratio A stringent indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling inventory. The acid-test ratio is far more strenuous than the working capital ratio, primarily because the working capital ratio allows for the inclusion of inventory assets. Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business.
Foodrich's quick ration fluctuates in three years span. In 2013 the quick ratio of Foodrich is below the industry average which may indicate liquidity problems of Foodrich. If we look at the current ratio ofFoodrich, the current ratio of Foodrich is way above the industry average but the same is not true for the quick ratio of the Foodrich which means that Foodrich is highly dependent of inventories. Since inventories is the more difficult asset to sell Foodrich may experience liquidity problems in the near future especially if demand for their products decreases.
ROA Return on asset is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage. ROA tells you what earnings were generated from invested capital (assets). The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million and total assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million, it has an ROA of 10%. Based on this example, the first company is better at converting its investment into profit.
The ROA of Foodrich is almost double the industry average which makes Foodrich more efficient in converting the assts of Foodrich into net income than its competitors.
Return on Equity
Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.
The ROE of Foodrich indicates that Foodrich is less efficient in utilizing the contributions of its investors. This may also indicate that Foodrich is more dependent in utilizing debts rather than equity contributions of investors to generate income. This will be more apparent when we also look at the ROA of Foodrich. As said above, ROA of Foodrich is almost double the industry average.
Return on Sales
A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin". This measure is helpful to management, providing insight into how much profit is being produced per unit currency of sales. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is growing more efficient, while a decreasing ROS could signal looming financial troubles.
Foodrich's ROS is below the inductry average but does not deviate much. While Foodrich's financil ratio would indicate that Foodrich may be less efficient, it does not make them totally inefficient since there is only a slight difference from the industry average. However, to improve this Foodrich needs to evaluate its operating procedures or processes ad remove all unnecessary or non-value adding activities. Debt to asset ratio / Debt Ratio This is a financial ratio that measures the extent of a companys or consumers leverage. The debt ratio is defined as the ratio of total debt to total assets, expressed in percentage, and can be interpreted as the proportion of a companys assets that are financed by debt. A debt ratio of greater than 1 indicates that a company has more debt than assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt. Not surprisingly, the debt ratio of Foodrich is higher than industry average. As said above, Foodrich is more dependent in utilizing funds sourced from debts rather that funds fueled by its shareholders. As such, the debt ratio of Foodrich is higher than the industry average.
Debt to equity ratio It is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the company could potentially generate more earnings than it would have without this outside financing. If this were to increase earnings by a greater amount than the debt cost (interest), then the shareholders benefit as more earnings are being spread among the same amount of shareholders. However, the cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This can lead to bankruptcy, which would leave shareholders with nothing.
The debt/equity ratio also depends on the industry in which the company operates. For example, capital-intensive industries such as auto manufacturing tend to have a debt/equity ratio above 2, while personal computer companies have a debt/equity of under 0.5. The debt ratio of Foodrich is higher than the industry average. It also indicates that Foodrich is more dependent on financing its company from debts rather than equity. While financing a company would entail additional inerest expense, studies have shown that it is more costly to finance a company with equity. Foodrich is not in a capital intensive industry thus its debt ratio is not more than 1. Receivables turnover This is an accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient.
A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. The receivable turnover of Foodrich is almost double the industry average. This may indicate that Foodrich is very efficient in collecting its receivables. However, if this ratio is too high this may push away valued clients. Average days receivable / Average collection period The approximate amount of time that it takes for a business to receive payments owed, in terms of receivables, from its customers and clients. Due to the size of transactions, most businesses allow customers to purchase goods or services via credit, but one of the problems with extending credit is not knowing when the customer will make cash payments. Therefore, possessing a lower average collection period is seen as optimal, because this means that it does not take a company very long to turn its receivables into cash. Ultimately, every business needs cash to pay off its own expenses (such as operating and administrative expenses). Foodrich has a collection problem. It takes too long for Foodrich to collect from his debtors. On the other hand, this may be the reason why more consumers are more willing to transact with Foodrich because Foodrich ectends more days as credit allowace to its customers. Inventory turnover A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days.".
This ratio should be compared against industry averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. Foodrich has high inventory which indicates that Foodrich has stong sales.