This analysis shows how a firm efficiently employs its assets in the production process. These ratios are called efficiency or asset utilization ratios (Walton, 2000). In this presentation, two ratios regularly used include inventory and receivables turnover.
The receivables turnover shows how a firm manages its accounts receivables. In simpler terms, it gives an indication of how fast a business collects its receivables. Receivables Turnover = Net sales on credit / Accounts Receivables.
Since the amount of the sales does not state if they were credit sales, we assume that that they are credit sales.
Therefore, receivables turnover in 2008 = 98800/ 5400 = 18.29 times. In 2009, the receivables turnover was =108000/8800= 12.27 times. To arrive at the average age of receivables in terms of days, we divide the total number of days in a year (365) by this value. Hence for 2008, we get 365/18.29= 19.95 days while in 2009, we obtain 365/12.27= 29.75 days
The higher the ratio, the more efficient a firm is in collection of its debts. In simple terms, a high receivables ratio indicates that a firm is capable of holding more cash than that whose receivables ratio is low. Generally, it is desirable to have a high receivables ratio. Clearly, the analysis shows that EEV performed better in 2008 as compared to its performance in 2009. This can be observed from the average collection period of 19.95 days and 29.75 days in 2008 and 2009 respectively.
Measurements associated with returns and activity ratios
They include measurements that explain or show how efficient a firm utilizes its resources in its operations. The most commonly used asset accounts include inventory, cumulative assets, and accounts receivables.
The resources that may be used by the companies may be measured by the corresponding ratios. The majority of the company makes great investments into business accounts that, in turn, lead to a common denominator in the corresponding sphere.
Reasons for selection of the measurements
In the determined associated companies of receivables, I have take into account the fact that most companies possessing great resources with the purpose of successful promotion. It is inevitable for firms to engage in credit sales because many customers rely on credit supplies. However, it is worth noting that in the absence of a coordinated policy, accounts receivable may be a challenging account for many firms.
On the other hand, assets are the key drivers for the production process. Because of this, firms invest many funds to ensure continuous operations.
Inventory is a critical element in firms dealing with the sale of tangible goods. To ascertain their reliability, firms employ their resources in ensuring the adequacy of inventory. Sufficiency of inventory demonstrates the ability of a firm to manage its working capital in the quest for making profits.
Review of the electronic equipment industry using financial ratios.
|Financial Ratio Analysis for EEV Ltd||EEV|
|Current ratio||Current Assets/ C. Liabilities||313.92%||372.47%|
|Acid Test ratio||(Cash +Short term Investment +Receivables) /CL||144.30%||160.71%|
|Profit margin||Net Income/ net Sales||5.71%||1.86%|
|Asset turn Over||Net sales/ average Assets||1421.58%||1244.24%|
|Return on assets||Net income/Average Assets||81.15%||64.98%|
|Ratio Analysis for Electronic Arts Inc.|
|Current ratio||Current Assets/ C. Liabilities||147.38%||274.65%|
|Acid Test ratio||(Cash+ Short term Investments + Receivables) /CL||139.90%||144.01%|
|Profit margin||Net Income/ Net Sales||-18.53%||-25.83%|
|Asset turn Over||Net sales/ average Assets||157.30%||180.08%|
|Return on assets||Net income/Average Assets||-29.14%||-43.95%|
Assessment of EEVs operating performance against these ratios
The analysis shows that EEV is able to maintain its liquidity with an improvement of about 60% from 2008 to 372%. It means that it has the ability to convert its non-cash assets into cash. Its high asset turnover in both years indicates that EEV’s asset management are perfect since little asset resources have ensured a high net sales. However, the profit margin of 5% and 2% in 2008 and 2009 respectively indicates that although the firm made many sales, it realized little profits.
Comparative performance analysis of EEV with Electric Arts Inc
In comparing EEVs performance, we research and analyze Electronic Arts (EA) Inc. Comparatively, EEV and EA performed equally well in terms of liquidity ratio in 2008 by recording 144%. It is notable that although EA records huge sales, it is poorly performing with respect to profitability. Its negative returns on assets as well as margins in both 2008 and 2009 reveal its inability to manage its resources (MsnMoney, 2011). EEV performed well by recording asset turnover 9 times higher than EA.
Effectiveness and reliability of financial measures
Financial measurements include ratios such as quick ratios, profitability ratios and, return on equity among others. On the other hand, quality of management, performance of a firm relative to industry metrics, and expectations of future performance. In reviewing the performance of a firm, it is imperative to examine its earning ability (Helfert, 2001). It means that absolute information is the most appropriate in establishing the position of a firm relative to industry and projected results (Wahlen et al., 2010).
To achieve in this process, financial analysts find the use of financial ratios the best in telling the inner financial truth of financial statements. According to Bragg (2007), performances of firms are attained by assessing its efficiency. It means that non-financial ratios lack the capacity to measure the efficiency of firms. This calls for application of measurements capable of revealing a firm’s efficiency through ratios such as return on assets and inventory turnover (Walton, 2000). When efficiency of a firm is established, stakeholders and potential investors gain an insight into how a firm manages its resources in the generation of profits.
Bragg, S. M. (2007). Financial analysis: a controller’s guide. New York, NY: John Wiley and Sons.
Helfert, E.A. (2001). Financial analysis: tools and techniques: a guide for managers. New York, NY: McGraw-Hill Professional.
MsnMoney. (2011). Financial Results for Electronic ArtsInc. Web.
Wahlen, J. M. et al. (2010). Financial reporting, financial statement analysis, and valuation: a strategic perspective. New York, NY: Cengage Learning.
Walton, P. (2000). Financial statement analysis: an international perspective. New York, NY: Cengage Learning EMEA.