During our six (6) weeks of observation, we observed CanGo management make important decisions about expanding and starting a new venture without the use of the company’s financials. A financial analysis can be used internally to evaluate issues such as employee performance, the efficiency of operations, and credit policies, and externally to evaluate possible investments and the credit-worthiness of borrowers, among other things. The information used in this report came from CanGo’s 2009 financial statements; balance sheet and income statement. The balance sheet list all assets, liabilities, and shareholder’s equity account balances and the income statement list all revenue/sales, expenses, and net income. We used this data to complete the following financial ratios; efficiency ratios, liquidity ratios, and profitable ratios. Then we compared CanGo’s efficiency ratios to Amazon.com to help show the strengths and weaknesses of the company’s financial health. Efficiency ratios are used to calculate the turnover of accounts receivable turnover and inventory turnover.
These ratios help analyze how quickly a company’s resources can be converted to cash or sales. The accounts receivable ratio was completed by net sales divided by net accounts receivables (50,000,000/32,120,000=1.56).
Currently, CanGo’s ratio is 1.56 means that they the company’s customer pays for their purchase in a timely manner or you can interpret as how quickly the company’s credit accounts are being collected. Compared to Amazon’s receivables ratio 31.3, CanGo receives it’s rather quickly. The next efficiency ratio is inventory turnover and the formula used, cost of goods sold/inventory (9,000,000/32,000,000=.28).
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The inventory turnover is important because it tells you how long it takes CanGo to move its merchandise. Compared to Amazon 10.5, CanGo turns over its inventory 2 times less than its competitor. The next section provides information about Debt management. Debt management (leverage) ratio help analyze the degree and of a company’s borrowed funds to finance its operation. We selected and calculated the most important ratio, debt to equity. The data used to calculate this ratio is long term debt divided by stockholder’s equity (94,900,000/141,000,000=.67).
The debt to equity ratio is important because it shows the soundness of the long term financial policies of the company. This means that the creditors have put in $.67 cents for every $1 the owners have invested. Liquidity ratios are used to help analyze the company’s ability to meet short-term financial obligations. The liquidity ratios calculated and analyzed in this section; current ratio, quick ratio, and working capital. CanGo’s current ratio is 5.39 and is calculated by dividing current assets by current liabilities (200,202,000/37,500,000=5.39), which indicates that the company can cover its liabilities. The quick ratio was calculated by subtracting inventory from current assets and dividing the total by current liabilities (current assets-inventory/current liabilities=5.39) According to sources, the standard ratio is 2:1 and is believed to be in sound financial condition. This means that CanGo has the ability to meet its short-term obligation with its most liquid assets. The final important information is the calculation of working capital, current assets minus current liabilities (202,020,000-37,500,000=164,520,000).
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This amount represents the funds available for day to day operations. In other words, it represents the company’s cash flow. Profitability ratios are next important ratios that will be discussed in the financial analysis section. They are used to help analyze management’s ability to control expenses and earn profits through the use of company’s resources. The financial data used in this section was extracted from the company’s balance sheet and income statement. CanGo return on assets ratio is 2.32, it was derived by dividing net income/assets x 100 (5,486,000/235,900,000 x 100= 2.32).
The last important ratio is return on sales and this ratio is calculated by dividing net profit by sales times 100 (5,486,000/500,000,000 x 100=10.98).
This ratio indicates how much profit is being produced per dollar of sales. In conclusion, CanGo 2009 financial analysis ratios indicates that the company is strong in being able to pay its debts, ability to turn receivables into cash rapidly, cash flow, profitability. On the other hand, the financial ratios indicate that the company is weak in turning over its inventory. We recommend that the company continue with its expansion and investment in on-line gaming plans. The company should consider training current employees verses hiring new employees and prepare and use a financial analysis report in the investment and financial decision-making process.
Works Cited
Reh, F. J. (n.d.).
Money Management. Retrieved 07 24, 2012, from About.com: http://management.about.com/bio/F-John-Reh-229.htm
