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Analysis of the balance sheet

The company’s total current assets increased by $ 4.3 million in the financial year 2013 compared to the previous year’s figure. The increase is attributed to the increase in the receivables and inventories. The company records an increase in property and land equipment but a general decrease in total assets in the financial year 2013. The reduction is attributed to a decrease in intangible assets by $ 12.2 million. Companies should maintain a desirable level of current assets to meet their current obligations. Therefore, based on current asset records, the company is financially stable. Looking at the financing strategy of the company, total equity amounts to $ 131.1 million as compared to the long-term debt figure of $ 71.9 million. Therefore, the company is unlikely to go under receivership thus exhibits a sustainable financial position (Medina 1988, pp. 56-99)

Evaluation of financial performance

Using the return on equity for the year 2013, 4.1%, it means that for every dollar of equity contributed by the shareholders, $0.04 profit is generated. In other words, for every dollar of profit to the company, $ 0.04 is contributed by the equity from shareholders. Return on total assets for the year 2013 gives a figure of 2.2%. This means that the return generated by every $ 10 invested in total assets is $ 0.2. In other words, in every ten dollar of the net profit, $ 0.2 is contributed by the investments in the total assets. Return on capital employed for the year 2013 gives a figure of 4.1%. This means that every one dollar of capital employed in the firm generates $ 0.04 to the company’s profit (Mclaney 2009, pp. 34-68).

How to measure the profitability of the firm

Profitability of the firm could be measured using net profit margin and/or gross profit margin. The net profit margin for the year 2013 gives a figure of 2.2%. This means that 2.2% of sales remained as profit while the remaining 97.8% of sales were used to cover other costs. Sales made an insignificant contribution toward the profitability of the company. The gross profit margin of the company gives a figure of 35.4%. This means that 35.4% of sales are gross profit while the remaining 64.6% of sales were used to cover up other expenses (Mclaney 2009, pp. 34-68).

Effect on return generation

Changes in the values of net profit affect the firms’ ability to make returns. That is, a smaller value of return on equity means that every dollar of equity makes an insignificant contribution to the company’s profitability. Decrease in the total assets reduces the firm’s ability to generate returns. For instance, a reduction in the inventory level of the firm would reduce the firm’s potential of generating revenues thus returns. Lastly, an increase in the capital assets through acquisition would increase the firm’s ability to generate more return. For instance, if an acquisition were made on a warehouse, the firm’s distribution network would be stronger thus, more profit would be experienced. Therefore, generation of more returns to shareholders would be possible. (Medina 1988, pp. 56-99).

List of References

Mclaney, E, J 2009, Business finance: theory and practice, Prentice Hall/Financial Times, Harlow, England.

Medina, R, G 1988, Business finance, Rex Book Store, Manila, Philippines.

Appendix 1: financial ratios

Source: Authors

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