Sg&a - Financial Data for the Company

Given the financial data for an unknown company over the past five calendar years, I calculated several financial ratios and interpreted them to understand the story behind the company’s financial performance. The numbers on the balance sheet and income statement reflect a company’s business, more specifically, its quantitative performance as a byproduct of its products and services. However, without the background of the company’s product and service offerings or industry placement, analysts must critically evaluate the numbers to understand the underlying realities driving its quantitative performance year over year.

The most notable observations I extracted from the company’s financial performance in 20X1 were its average collection period and its return on equity. The average collection period of 86 days is high indicating that the company takes almost three months to collect the cash from credit sales. In addition, the company showcased a large accounts payable balance in 20X1 which makes me cautious as a prospective investor or lender in regards to whether or not the company has a difficult time paying off their vendors and suppliers. Additionally, the company spent 82% of revenues on cost of goods sold and has 41% of current assets in inventory. So, I calculated the inventory turnover rate of 3.36, meaning that the company only turns over its inventory 3.36 times per year. If the inventory turnover rate had stayed the same throughout the following four years, then the company would have a large proportion of current assets tied up in inventory. High levels of inventory add to reduce FCF and leads to lower stock prices. Additionally, it makes me wonder if the company is holding obsolete goods not worth their current market value. I believe that the company needs to develop a more efficient way to manage their inventory starting in the purchasing department because there is a lot of money sitting on a shelf for ⅓ of the year. If the average collection period rate had stayed at the levels they were at for the following four years, then receivables would have kept increasing as sales revenue increased, and the company would have less cash available to allocate toward accounts payable and other liabilities. Next, in 20X1, the company had a debt to equity ratio of 94.27% signifying that it is aggressively funding growth with debt. However, the interest expense is only 0.5% of sales, therefore, it didn’t cause any volatility in earnings and the times interest earned ratio of 10.53 indicates that the company can feasibly meet its debt obligations.

In 20X2, this company drastically increased their profits. While the increase in revenue was 29%, the operating profit doubled which testifies that the company managed operations related expenses more efficiently than in the previous year. However, I noticed that the reported earnings per share decreased by roughly 70% and cash also decreased by 60%. These figures suggest that the company decided to allocate its earnings toward the interest payment instead of passing it onto its shareholders. The current portion of long term debt increased by 450% meaning that the company is going to have to pay off a significant portion of the debt next year. Similarly, the debt to equity ratio increased by 4% indicating that the company is taking on more debt to finance its growth. The relatively consistent earnings this company exhibits intuitively supports the notion that lenders view the company as one in a good position to consistently deliver interest and principle payments. Next, as I mentioned in the previous paragraph, the company did manage to decrease its average collection period by 22%. Since the accounts payable balance decreased by 37%, I presume that the company used more of its receivables to pay off its vendors. Overall, the company performed well in 20X2 in regards to managing expenses and increasing earnings from the top down.

Advancing onto 20X3, sales revenue decreased and operating income decreased by approximately ⅓ which suggests that the company was less successful in its operations. While operations related expenses decreased, the fixed asset turnover rate decreased indicating that the plant and equipment generated less sales than in the previous year. An explanation for the decrease in operating profit could also be attributed to the decrease in inventory turnover by 15%. Perhaps the company experienced a substantial increase in storage costs. The profit margin also decreased by roughly ⅓ which could be a result of the 97% increase in the interest expense. As I mentioned before, the interest expense is positively correlated with earnings volatility. As an analyst, I am weary about the proportion of debt financing the company is devoting to finance its growth in operations because the return on investment is -40%. Additionally, the times interest earned ratio decreased by 75% from last year which begs the question of whether or not the company may have difficulty paying interest in later years.

In 20X4, sales revenue materially increased, as did operating income and the net profit margin. The fixed asset turnover rate increased by 530%; more than double that of the previous