Snags Ltd is a company running its manufacturing business of sausages, hams and traditional small goods in Australia. The company has been performing exceptionally well since its inception, but the recent few years have proved to be tough for the company’s management. The recent decline in the performance of the company’s business has led the company’s management to look into the issue and find out what is missing. As a result the following analysis has been carried out keeping in view the financial position of the company for the last three years. The analysis has been conducted by comparing the financial ratios of the company with the last three years’ industry performances. The analysis revealed the areas where company is doing good and the weaker areas which require improvement. The comparison has also been interpreted side by side for a better understanding of the underlying meanings. At the end of this report there are some recommendations given to the management.
The current ratio of the company in 2010 is 4.62:1 (See Appendix). Industry’s standard ratio is 7.3 for best performers and 4.1 for moderate firms. Keeping this in view, the company performed well to be placed in the moderate performers list, but the company still has room to improve its proportion of current assets over current liabilities to become a best performing firm. Although, current ratios of the company in previous three years shows a significant improvement in handling current assets to cover their current liabilities (C.C.D.Consultants 2010).
Quick ratio of Snags Limited is 1.24 in 2010 as against the industry standards of 2.1 for moderate performers and 1.3 for worst performing companies (See Appendix). It implies that the company is relatively weak in handling liquid assets that can be used as cash when needed. But from previous three years, the company is showing a trend of improvement in handling liquid assets. It is possible that the company is going to perform better in the future (C.C.D.Consultants 2010).
The debtors returned the amount of Snag Limited in 69.91 days in 2010 (See Appendix); the industry standards provide a figure of 63 days for worst performing companies and 51 days for medium performers. It implies that the Snags Ltd has failed to recover its debts as compared to the policies adopted by its competitors. The recovery policies has gotten worst and worst in recent years for Snags Ltd, as it is reflected in the ratio analysis of last three years (C.C.D.Consultants 2010).
The days sales of inventory ratio of Snags have got weaker and weaker during the last 3 years. 2008 was the worst one when the ratios touched highest point, 243.06 days for utilizing the inventory in the process of production (See Appendix). It indicates that resources were not been used efficiently. But the last year, 2010, Harrods improved their usage of their assets. This indicates that Harrods have started to take measures to improve the usage of their resources. But, if we compare Snags’ inventory turnover ratio with that of industry, we will find that the company is considered to be the worst in utilizing its resources (C.C.D.Consultants 2010).
Debt to Equity Ratio
Snags’ gearing ratio in 2010 has declined to 2.41 from 2.49 in 2009 (See Appendix). This shows that the cash flow of the company was slightly unstable in 2010 as compare to 2009. Against the industry standards, we can say that Snags’ has maintained a moderate performance (C.C.D.Consultants 2010).
Gross Profit Margin
Snags’ gross profit margin has declined as compare to last two years. In 2010, company’s gross profit margin is 24.3% and in 2009, it was 35.90%. This indicates that Snags business performance is continuously declining (See Appendix). Also, the company has failed even to match its rivals and industry standards. The company can be termed as a moderate performing business due to its gross profit margin (C.C.D.Consultants 2010).
The asset turnover ratio of Snags is at the lowest level in its respective industry. Against the industry standard of 10 days for excellent performers, 5 days for moderate and 3 days for worst performers, Snags’ asset turnover ratio is 1.20:1 (See Appendix). This ratio has remained inconsistent over the last three years, which reflects an unclear policy regarding the investments made in assets of the company. Reason can be that the sales of the company were low in 2010 or the company has invested too much in their fixed assets (C.C.D.Consultants 2010).
Return on Equity
Snags’ return on equity has shown a significant decline in last three years, which indicates that the company has not made any significant returns on the equity they used to carry out their business. The ratio dropped to 4.50% in 2010 from a phenomenal 56.57% in 2009. If we compare this ratio of Snags, with that of industry standards, we will find that the company is performing even below the industry standards for worst companies (See Appendix). Thus, investors will show a negative reaction towards buying the stock of Snags Ltd (C.C.D.Consultants 2010).
Return On Assets
The return on assets ratio also provides a disappointing figure for not only the company, but also for the investors. The ratio dropped to 1.32% in 2010 from 16.20% in 2009. It implies that the company’s assets’ value is higher than its income which reflects inefficiency at operating level (See Appendix). Like return on equity, the company performs below the standards for worst performing companies (C.C.D.Consultants 2010).
Considering the above results, the overall analysis shows that the company is inefficient and performing below par. This implies that if in the near future the industry goes through mergers and acquisitions, Snags Ltd will surely be the part of it. In order to avoid this from happening it is recommended to the company to improve its performance by focusing on its almost every aspect of its operations. But firstly the company shall focus on managing its balance sheet items. Moreover the drastic decline in gross profit shall also be considered and the idea of launching new product line shall be reviewed in context of the past experiences. Apart from these issues the company has decided to launch an aggressive advertisement campaign which is expected to have a good impact on the consumers. However, it shall be noted that in 2010 the company’s operating expenses were too high as compared to the previous years and thus the management shall revisit the advertising budget and make sure it will not add further pressure on the gross profits next year. Keeping in view the performance of the company in 2010 it is pertinent that the company shall also make changes in its management style so as to improve the efficiency of its operations (Drake 2010).
C.C.D.Consultants, 2010. Financial Ratios Resources. Web.
Drake, P.P., 2010. Financial Ratio Analysis. Web.
|2010||2009||2008||Best 25% Firms||Middle Firm||Worst 25% Firms|
|Return on Equity||Net Profit / Total Equity||4.50%||56.57%||55.43%||40%||19%||10%|
|Return on Assets||Net Profit / Total Assets||1.32%||16.20%||18.15%||32%||18%||7%|
|Asset Turnover||Net Revenue / Total Assets||1.20||1.12||1.44||10||5||3|
|Inventory Turnover||365/Inventory Turnover||192.69||204.40||243.06||120||134||152|
|Accounts Receivables Turnover||365/Receivables Turnover||69.91||58.03||67.48||45||51||63|
|Gross Profit Ratio||Gross Profit / Net Revenue||24.43%||35.90%||43.73%||35%||22%||10%|
|Current Ratio||Current Assets / Current Liabilities||4.62||2.68||2.14||7.3||4.1||2.7|
|Quick Ratio||Current Assets – Inventory / Current Liabilities||1.24||0.75||0.55||2.4||2.1||1.3|
|Debt to Equity Ratio||Total Liabilities / Total Equity||2.41||2.49||2.05||3.02||2.04||1.17|
|Earnings per Share||Net Profit Attributable to Common Shareholders / Number of Outstanding Shares||0.03||0.33||0.34|
|Dividend Payout||Dividend Paid / EPS||267%||109%||106%|
|Price Earnings Ratio||Price per Share / EPS||14.33||1.36||2.91|