Introduction
The performance of a business is measured using different aspects such as sales and per-share price. In most cases, managers or senior leaders can worry when the financial indicators decline, hence revealing a fall in the organizational operations. This report analyzes some of the most used measures that can help Signal Cables Company succeed. They include profit margin, liquidity ratios, book value, days of inventory outstanding, free cash flow, and networking capital. Based on the analysis’s outcome, the firm can understand its financial performance, which is critical to potential investors. Each of these values has been analyzed, and explanations are given to provide further direction to the leadership.
Analysis of Profit Margin
The observation from the Signal Cables Company’s balance sheet reveals the dependence of stock price on an investor’s expectations, which might or might not depend on the absolute value of net income. One of the reasons for the fall in stock price may be the decrease in profit margin from 7.4% to 7.0%
Profit margin = Net Income / Sales
Another important reason which has impacted investors’ expectations is the decrease in the Debt to equity ratio (Ding & Qin, 2020). The D/E ratio increased from 0.72 to 2.494, revealing the situation where the company, operates. In particular, the firm is under massive debts, which puts it to have several obligations, which have led to the rise in issues that worry investors.
D/E = Total Debt / total equity
Analysis of Liquidity Ratios
Liquidity analysis can help Signal Cables Company understand the organization’s ability to settle its short-term liabilities. According to Restianti and Agustina (2018), liquidity can be measured using various financial ratios as follows:
- Current ratio = Current assets/ Current Liabilities
- Quick ratio = Current assets- Inventories / Current Liabilities
- Cash ratio = Cash and cash equivalents / Current liabilities
Based on the ratios, Signal Cables Company has a good liquidity position with the current ratio ranging more than 2. The evidence from the data reveals the change in liquidity ratio, which has decreased from 2003 to 2004, hence revealing the weakening of the organization’s liquidity position. This is mainly because of the decrease in cash and marketable securities. The absolute liquidity ratio is quite less, approximately equal to 0.11 in 2003 and 0.005 in 2004, which is less than the expected ratio of 0.5:1, which is a standard value, hence indicating that the company is short of absolute liquid assets.
Analysis of the Company’s Book Value
The book value of a company refers to its accounting numbers as presented in its books. The book value of the Signal Cables Company is given by taking its total assets less than total liabilities. This outcome can also help in analyzing the company’s book value per share, which is given by book value divided by total outstanding shares.
According to Arslan and Kızıl (2019), the book value reflects the theoretical value the company is worth if all the assets are sold and liabilities are paid off. For a company with large assets, book value does reflect the fair value of the company.
Analysis of Days of Inventory Outstanding
Signal Cables Company’s cash balance decreased massively and the major reason behind this is the increase in the period for which the customers have delayed the payment to the firm. This factor is measured by Days of Receivables outstanding/ Days of sales outstanding (DSO) as provided for in the cash flow. The DSO has increased drastically and more than doubled in just one year. This implies the company’s approach to make lenient rules for the customers to pay back.
DSO = Average Account receivables * Number of days in a period/ sales
Another reason is the increase in the holding period of inventory which is measured by Days of inventory outstanding (DIO). This number has also increased (174.22 to 304.495) which is also supported by the facts mentioned in the case whereby the company has increased its inventory to meet the demands. This binds the cash with inventory and hence decreases the cash balance.
DIO = Average inventory* Number of days in a period/ sales
Overall the cash conversion cycle (CCC) measures the efficiency of a company to manage its cash. The CCC has increased from 2003 to 2004, which reveals the company’s ability to hold cash with itself (Chang, 2018).
CCC= Days of sales outstanding+ Days of inventory outstanding – Days of payable outstanding.
Analysis of Free Cash Flow
Free Cash Flow (FCF) = Operating Cash Flow – Capital Expenditures
= (Net income + Non-Cash expenses- increase in working capital)-Capital expenditures
= (143,100 + 600,000-145,000)-(711000 + 232,000)
= (344900)
Signal Cables Company’s free cash flow value is negative, revealing that the company is struggling with its available finances. According to Imhanzenobe and Adeyemi (2020), free cash flow shows an organization’s possession of money it can use to expand its operation, develop new products, redeem stock, pay dividends, or repay its debts. When FCF is high or increases with time, it shows the company is doing well in the business and is thriving in its current environment. Based on the data from the balance sheet, the company lacks the ability to make cash, which forms a significant part of in-stock pricing.
Analysis of Working of Capital
Net working capital = Current assets-current liabilities
For 2003
890,000- 355,000
= 535,000
For 2004
1,845,450- 895,000
= 950,450
The Signal Cables’ net working capital from the above calculation produces a positive value, which reveals the company has sufficient current assets necessary for it to meet all its current liabilities. According to Bendavid et al. (2017), the value obtained as the working capital indicates whether the company can settle its current liabilities and will remain with the obtained amount to continue operating at its optimal level.
Shareholders’ Information
Shareholders need to be more concerned with Signal Cables’ free cash flow than with earnings per share. Puspitaningtyas (2018) reveals the significance of free cash flow, which acts as a significant measure for a company’s ability to generate revenue. This aspect is particularly important in the operation of the business as its forms the basis for stock pricing. Consequently, free cash flow is more valued than any other measure of finance in business organizations.
Conclusion
The analysis of critical performance indicators ensures that the Signal Cables Company management can understand its challenges in managing its operations. The organization can effectively address where it lags to improve its performance in the industry. In this analysis, profit margins were the major worry to the management since they were reduced due to different market factors. The investigations have revealed that the shareholders need to worry about the available cash that the company can use to run its operations instead of the earnings per share. However, the findings reveal that the company is operating at a negative free cash flow, which reveals that the firm is underperforming in the industry.
References
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Bendavid, I., Herer, Y. T., & YĂĽcesan, E. (2017). Inventory management under working capital constraints. Journal of Simulation, 11(1), 62-74.
Chang, C. C. (2018). Cash conversion cycle and corporate performance: Global evidence. International Review of Economics & Finance, 56, 568-581.
Ding, G., & Qin, L. (2020). Study on the prediction of stock price based on the associated network model of LSTM. International Journal of Machine Learning and Cybernetics, 11(6), 1307-1317.
Imhanzenobe, J. O., & Adeyemi, S. B. (2020). Financial decisions and sustainable cash flow in Nigerian manufacturing companies. International Journal of Management, Economics and Social Sciences (IJMESS), 9(2), 90-112.
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Restianti, T., & Agustina, L. (2018). The effect of financial ratios on financial distress conditions in sub-industrial sector companies. Accounting Analysis Journal, 7(1), 25-33.