Introduction
From the analysis, the working capital of the company is -1743300 as at 03/30/2021. This value indicates that the company might have incurred a big amount of cash outlay. In another case, it might have experienced a massive increase in its respective accounts payables resulted from large purchases of services and products from its suppliers. The company should aim at reducing accounts payables.
Current ratio: 0.91
The current ratio is 0.91which is below the required ratio of 1.5 therefore, it implies that the business is struggling to pay its obligations due within a period of less than one year. In this case, a value of 0.908 makes the company’s lenders afraid because it means the company does not have the required amount of current assets needed to service its current liabilities.
Debt ratio: 0.27
The debt ratio is 0.27; it is used to determine the leverage used by a company in terms of total assets and debt. The ratio for this company is less than one, which indicates that the company has more assets than the total debt. Banks and investors are easily attracted to the lower debt ratio since it implies that there is less financial risk compared to other companies.
Earnings per share: 2.783
EPS of the company is 2.783 it indicates the amount of money made by the company for a share of its stock in the market. In this case, the company earns 2.857 for each share of its stock which shows the good financial health of the company. Having a consistent positive value of EPS implies that the business organization is performing effectively in the market, resulting in better financial performance.
Price/earnings ratio: 2.783
The P/E of the company is 2.783 that is below average, meaning that the business firm has undervalued its shares, therefore, can easily attract investors. P/E is useful in valuing the possibility of a company’s performance in the stock market. With low or undervalued shares, the business is at a better chance of getting more resources when it trades the shares in the market to get equity.
Total asset turnover ratio: 0.05
The total asset turnover ratio is 0.05, which shows the efficiency rate of the business converting its assets into sales income. Based on the analysis, the company has a low rate of generating sales revenue from the available assets. This indicates that, since it is a company under the utility sector, the asset turnover is below 0.25, which is not healthy. This is because it is generating less revenue using its assets.
Financial leverage: 7.6
The leverage ratio is equal to 7.6; this implies that the company is at a very high risk of default compared to companies with low leverage ratios. Bond investors mostly use these metrics, and in this case, the bond investor will not be attracted to invest with the company. The ratio measures the amount of debt that a company has to its EBITDA.
Net profit margin: 27%
The company’s net profit margin is 0.27 this indicates the amount of net income the business organization makes with the total available sales. This 27% net profit margin implies that the company is efficient at converting its sales into a profit. It can take advantage of new opportunities. Therefore, its financial performance is effective and can compete in the market.
Return on assets: 1.1%
The company has a ROA of 1.1 %, which is below the required rate of 5%. The ratio shows that the organization’s management team is inefficient and less effective in utilizing the available assets to generate income. A higher ROA above 5% is considered better for a business. In this case, the company generates 1.1% for every $1 in its assets, which is very low for an organization.
Return on equity: 9.02%
The return on equity of the company is 9.02% this ratio indicates how good a company is at deploying its shareholder capital. According to the analysis, the company’s ROE is 9.02% that is below average. It, therefore, means the management is not maximizing the available resources of the organization to generate more income. The business entity should formulate better ways to invest the shareholders’ equity to make more profits.
Working Capital Management
Working capital management is vital when it comes to the issue of short-term decisions regarding investments and liquidity. To be specific, it affects the liquidity and the profitability of the firm, the company’s value is enhanced by working capital management that is optimal (Boisjoly et al., 2020). For instance, in our case, if the company could manage its current assets and liabilities well, liquidity could have been enhanced.
Bond Investment
Some investors prefer corporate bonds claiming that yield generated from many fixed income securities declined after the coronavirus pandemic, compared to corporate bonds. The advantages the company may enjoy after investing in corporate bonds are liquidity and various options; short-term, long-term, and medium term maturity corporate bonds. These bonds are less risky and less volatile compared to other bonds. The main drawbacks the company may face when investing in such bonds include; lower returns which may result in the fact that they have lower risks.
Capital Equipment
The main advantage of this type of investment is that the business will have full ownership of the equipment compared to leasing. The capital equipment may also be used in claiming capital allowances, a great advantage to the owner. In addition, investing in capital equipment allows the business not to tie itself into long-term agreements, which may negatively affect the organization’s operations (Boisjoly et al., 2020). The disadvantages include that the company/business will have to pay the full cost of the asset upfront, which may significantly affect the business cash flow. Furthermore, the organization may need to use an overdraft or loan facility to acquire the equipment. Higher maintenance and repair costs, depreciation are also disadvantages of such decisions.
Capital Lease
A capital lease has the following conditions that must be met, the life of the lease must be exceeding 75% of the assets life, there must be a transfer of ownership of the asset from the lesser to the lessee as the lease time ends, an option to purchase the asset must be there, and the NPV of the lease payments exceeds 90% (Prihartono & Asandimitra, 2018). The advantages to the company in case of this decision include the benefit of ownership in that the lessee can use the asset for more than 75% of its life, and at the end of the lease term, there is an option to purchase the asset. Furthermore, the company has a claim to depreciation this is by showing the asset in the company’s balance sheet. Risks and disadvantages are that the decisions lead to an unfavorable debt to equity ratio since it involves increasing a lot of debt to the balance sheet, scaring away investors.
Financial Evaluation
Financing
Firms usually make decisions that involve spending funds in the present to earn profits in the future. For early-stage financing, a company has the following options to finance its operations and expansions; venture capital firms which will fund the business if its future is promising. The profits are another source of adding capital, borrowing from banks and bonds, corporate sticks and public firms, leasing, and mortgages.
Bond Investment
Bond financing is a type of finance whereby a group of investors or lenders mark a bond that has been issued by a company that needs a loan. This type of investment is well suited for the company’s expansion agendas as well as operations (Prihartono & Asandimitra, 2018). The company may issue a bond which is a long-term financing tool to raise money for purchasing long-term assets.
Capital Equipment
This is also referred to as equipment financing, a type of business funding that provides the capital required to purchase the needed equipment. It is a process that provides the company with the required finance to acquire the necessary assets. Here, the equipment that is being purchased acts as collateral for the loan facility. This implies that if the company timely repays the whole loan, it will gain the right to continue using and accessing the asset. The advantage of this type of financing is that the company will have the working capital required to meet unending expenses such as payrolls, rent, and other repetitive costs.
Capital Lease
A capital lease has the following conditions that must be met, the life of the lease must be exceeding 75% of the assets life. There is the transfer of ownership of the asset from the lesser to the lessee as the lease time ends, an option to purchase the asset must be there, and the NPV of the lease payments exceeds 90% (Ma & Thomas, 2021). The following are some of the advantages to the company in case of this decision; the benefit of ownership in that the lessee can use the asset for more than 75% of its life. Furthermore, at the end of the lease term, there is an option to purchase the asset. The risks and disadvantages are that creditors cannot easily lend the company money. This is because capital lease increases the debt value in the balance sheet of the business organization, raising the debt to equity ratio, making it unfavorable for the organization’s financial health.
Short-Term Financing
Short-term financing refers to the funding of business operations and expansion using short-term loans. Short-term sources are often for one year or less (Prihartono & Asandimitra, 2018). This type of financing will allow the company to generate the cash required for maintaining expenses which are usually recurrent during the fiscal period. These sources may include cash from online loans, invoice financing and lines of credit, bank overdrafts, and trade credit.
Future Financial Considerations
In the future, the business organization should consider improving its liquidity. The management should ensure that the current ratio ranges closer or above the market value in the industry because a lower current ratio indicates higher default risk and distress to the firm’s financial health. Similarly, the company should reduce the value of its accounts payables as a higher amount reduces its liquidity.
Financial Recommendation
According to financial analysis, the company should first aim at reducing its accounts payables. Secondly, the best financial sources to fund its operations and expansion are a bond investment, capital equipment, and capital lease. Bond investment is supported since the company has a good financial leverage ratio. Capital investment is also applicable in this situation since our debt to assets ratio is favorable, which easily attracts banks, whereby we can use the purchased asset as collateral for the loan used to buy it.
References
Boisjoly, R. P., Conine Jr, T. E., & McDonald IV, M. B. (2020). Working capital management: Financial and valuation impacts. Journal of Business Research, 108, 1-8. Web.
Ma, M. S., & Thomas, W. B. (2021). Economic consequences of operating lease recognition. Wayne B., Economic Consequences of Operating Lease Recognition. Web.
Prihartono, M. R. D., & Asandimitra, N. (2018). Analysis factors influencing financial management behavior. International Journal of Academic Research in Business and Social Sciences, 8(8), 308-326. Web.