Business / Summary Of Riordan'S Financial Status
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Autor: anton 23 December 2010
Words: 1011 | Pages: 5
Figures in Riordan's financial statements and the computations of its financial ratios suggest that the company is in a precarious financial state. While Riordan has some working capital and an acceptable current ratio, its quick ratio (which is a better indicator of a company's health) falls below acceptable standards. At 56%, its debt to equity ratio is excessive by industry standards and implies that the company heavily relies on debt to facilitate operations. While it generated a positive net profit in 2005, its profit margin and return on assets are lower than that of other businesses within its industry--this suggests that Riordan may have problems regarding profitability.
Riordan does not have enough cash to pay off its current liabilities and long-term debt. This may mean that Riordan is having problems converting assets to cash, and may be danger of bankruptcy--comparing its cash to its debts shows that Riordan appears to be relying on long-term debt to survive. Riordan also has a very high inventory, which means that they are having difficulties selling products for profit. A huge chunk of its assets are also tied up to receivables--suggesting that the company may be having problems collecting payment.
On a positive note, its current ratio is close to the ideal, which signals that Riordan's management is efficient in managing its cash flows. However, Riordan's quick ratio (which is a better indicator of a company's financial health) comes out as very low compared to acceptable standards. Its debt to equity ratio is also very high, further affirming that it relies too much on debt to finance its operations. As such, lending institutions may be less willing to lend financial assistance to the company. In addition to this, while Riordan's sales, gross margin, operating profit, and net profit have increase from the previous fiscal year, its profit margin and return on assets have shown lackluster performance--this shows that the company's profitability leaves much to be desired.
Balance sheet analysis
Riordan's balance sheet can be analyzed to determine the value of the company. The balance sheet reports the assets, liabilities and net worth at a specific period in time--it provides a "snapshot" of the company's financial standing at a certain point or instant in time. Particularly, Riordan's balance sheet reflects the company's position in that instant when all transactions for September 30 (the end of its fiscal year) were recorded. It shows what Riordan owns, as well as debts as of September 30.
Information on the balance sheet presents valuable information to banks and financial institutions in determining whether or not Riordan could qualify for loans and other forms of financial assistance. Current and potential investors can also look into it as a means of valuation of the company's net assets.
Important financial ratios and statistics generated from figures in the balance sheet are key the indicators of its financial health. Riordan's working capital (current assets minus current liabilities) is currently valued at $7,580,998--this indicates whether or not the company can pay current obligations. A positive figure means that the company is likely or has the ability to pay its dues on time (e.g. bills, payroll, loan payments).
Its current asset to liability ratio (current ratio) is approximately 2:1, which means that there are twice as many current assets as there are current liabilities.
The current ratio gives an idea of the company's ability to pay current, short-term obligations. A ratio of more than 1 suggests that it can pay most of its debts at that certain point in time. Riordan's current ratio is 2.09, and this suggests (in the least) that the company is efficient in operating its business cycle. The ability to effectively turn products into cash is a good sign of a company's financial state. However, the quick ratio (which is the same as current ratio, but excludes inventory, supplies, and prepaid expenses) is a better indicator of the company's ability to quickly come up with cash, and Riordan's quick ratio only comes to 0.91--lower than acceptable standards.
The next financial ratio involves the relationship between the total liabilities and the total stockholders' equity: The debt/leverage ratio shows how a company finances its assets--the higher the debt ratio, the larger their debt. Riordan's debt to equity ratio is 0.56 (56%)--which is above the industry average of 8.04%. Riordan's high ratio means that it relies heavily on debt to finance its growth (an this usually results to revenues being volatile).
Income statement analysis
Riordan's statement of income depicts the company's profitability--it shows whether or not the company made money or has the capacity to make money in the future. The statement of income contains facts, estimates, and a certain selectivity when it comes to choosing which items should be included. The statement of income is a report of the company's income and expenses during a specific range in time--Riordan's net profit or loss for a specific period (in this case, 12 months) is determined by comparing the company's income over the specific period to cash spent for the purpose of generating revenue during the same period.
The sales figure is the amount of money that the company has generated for the current fiscal year. However, it has nothing to do with profit. A net gain in the bottom of Riordan's income statement is the figure that represents actual profit and a positive amount means that the company was able to generate revenue.
A quick look at the income statement shows that sales, gross margin, operating profit, and net profit after taxes have increased from the previous fiscal year. However, the profit margin (which measures how much the company earns for every dollar of sales--a useful ratio in comparing the firm's financial state than those in the same or similar industries--is only 0.04, as opposed to the industry average of 0.7. This suggests that Riordan is less effective in keeping its costs low and is less profitable than other companies doing the same business.
Return on assets reveals a company's profitability in terms of generating revenue from the assets they have. Riordan's ROA ratio of 0.06 (6%) suggests that Riordan may be having difficulties converting investment into profit.
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