The financial performance summary of Hillside Inc. will be assessed depending on the various financial ratios calculated. The ratios include liquidity ratios, asset management ratios, financial leverage ratios, and profitability ratios. As estimated, from the liquidity ratios, the current ratio, quick ratio, and average payment ratio, the following summary can be derived. The Company has a current balance of 1.75 times, according to Rashid (2018), makes the Company a viable investment platform since its current ratio is greater than 1. Economists use liquidity positions to analyze a firm’s financial stability (Rashid, 2018). However, with a quick ratio of 0.47 (times) less than 1, it is less likely a company worth investing in. A shorter payment period, 24 days, of its credit purchases, places it in a position to obtain goods on credit terms since suppliers expect the payments after a short time.
The following performance summary can be made about its asset management tools, including total asset turnover, average collection periods, and inventory turnover ratios. With a total asset turnover ratio of 0.8 times less than 1, it only means that the total available assets cannot produce enough revenue at the end of the financial period. Consequently, Nguyen (2021) insinuates that a lower average collection period stipulates that the collection of invoices made is productive and convenient. Therefore, a more down average collection period of 22 days specifies that the Company’s collection is effective and efficient. The Company’s inventory turnover of 11.40 times is not appropriate as it shows a slower rate of purchasing and restocking its stock.
Concerning its financial leverage ratios that include the total debt to total asset ratio, Iqbal and Usman (2018) suggest that financial leverage is essential in increasing production capacity, increasing shareholders’ wealth, and purchasing a new property. Hillside Inc. has a total debt to total asset ratio of 37%, translating to a viable investment opportunity for investors. The fact that investors will generally consider investing in a company with a total debt to asset ratio of between 30% and 60% makes such companies viable and worth investing in (Iqbal & Usman, 2018). Subsequently, with an equity multiplier of 1.56 times, it enumerates that Hillside Inc. has lower financial leverage, thus fewer debts it uses to finance a majority of its assets.
The profitability ratios that include operating profit margin, net profit margin, return on total assets, and return on equity are profitability ratios that financial economists and investors use to measure a business’s potential. The capacity includes establishing income concerning shareholders’ equity, balance sheet assets, revenue, and operating costs over a specified period. The Company has a lower operating margin of 5.7%, which shows that it generates lower earnings from its business operations. Consequently, a lower net profit margin of 3.55% indicates that Hillside Inc. generates low income from its operations. The percentage return on total assets of Hillside Inc. is 10.32%, insinuating that it generates higher profits. The Company’s return on equity is 16.13%, meaning that the management can generate enough income from the available equity.
Computation of Financial Ratios
Liquidity Ratios
Current Ratio
The current ratio is obtained by dividing the total existing assets by the total current liabilities (Rashid, 2018).
Quick Ratio
The quick ratio is calculated by the following formula (Rashid, 2018)
Average Payment Period
The following formula computes the above financial ratio according to Iqbal and Usman (2018). Average Payment Period =
Asset Management Ratios
Total Asset Turnover
The following formula computes the above financial ratio according to Iqbal and Usman (2018). Total Asset Turnover =
Average Collection Period
The following formula computes the above financial ratio according to Iqbal and Usman (2018). Average collection period =
Inventory Turnover
The following formula computes the above financial ratio according to Iqbal and Usman (2018). Inventory turnover =
Financial Leverage Ratios
Total Debt to Total Asset Ratio
The above ratio is calculated by
Equity Multiplier
Equity multiplier =
Profitability Ratios
Operating Profit Margin
Rashid (2018) represents the formula for calculating operating profit margin as
Net Profit Margin
Iqbal and Usman (2018) justify the following formula for calculating the net profit margin. Net profit margin =
Return on Total Assets
According to Iqbal and Usman (2018), return on total assets is obtained by dividing the net income by the total assets then multiplying the result by 100%. Thus, the return on total assets =
Return on Equity
The following formula computes the above financial ratio according to Iqbal and Usman (2018). ROE =
Earnings Per Share
Rashid (2018) enumerates the formula for calculating the earnings per share of a company. EPS =
References
Iqbal, U., & Usman, M. (2018). Impact of financial leverage on firm performance: Textile composite companies of Pakistan. SEISENSE Journal of Management, 1(2), 70-78.
Nguyen, T. (2021). Functions of receivable account team and payable account team at finance department. The influence of average collection period on financial health and the process of payable management at Ernst and Young Vietnam.
Rashid, C. A. (2018). Efficiency of financial ratios analysis for evaluating companies’ liquidity. International Journal of Social Sciences & Educational Studies, 4(4), 110-123.