Essay Example on Financial Performance Measurement

Published: 2022-07-15 14:28:16
Essay Example on Financial Performance Measurement
Type of paper:  Essay
Categories: Financial analysis Financial management
Pages: 6
Wordcount: 1385 words
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Current Ratio Test

The current ratio refers to the liquidity and efficiency ratio which measures the ability of the firm to pay off its current liabilities with its short time assets. The current rate is a crucial measure of liquidity because current responsibilities are to be paid within one year. This implies that the organization has inadequate time to raise funds to pay off these current liabilities. Current assets such as cash equivalents, cash, and marketable securities can be converted easily into cash within the short period (Ketz, 2017). This implies that the corporations with huge amounts of short time assets will easily pay off short time liabilities when the deadline for payments is due without auctioning the long-term assets. The current ratio of the Sony company is 1.6, implying that the company is in a position to meet its daily obligation.

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The current ratio assists the creditors, and the investors comprehend the liquidity of the company and an efficient way how the company can pay off its short time liabilities. This ratio is an expression of the current debt of the firm regarding the existing assets. Therefore a current ratio of 5 implies that the company has five times more short time assets than short time liabilities. A company having a higher current ratio suggest that it is more favorable than a company having a lower current ratio since it shows the company capability of paying off its short time payments.

Suppose the company must fixed assets to cater for the short time liabilities, this implies that the company is unable to make adequate money from that make it possible activities to be carried out. The company is becoming bankrupt or losing money, in other words. This is due to weak and inefficient collections of accounts receivable. The current ratio, also, is a good indicator of the debt burden that the company is undergoing. Suppose a company is brought down by its short time debt, then the cash flow will deteriorate.

The acid test ratio or quick ratio

The acid test ratio or quick ratio is a typical ratio that measures the capability of the company to pay off its short-term liabilities when the deadline for payment is due using only quick assets. Quick assets are short-term assets that can be easily converted to ready cash in the short time. Cash equivalents, cash, marketable or short-term investments, as well as accounts receivables are taken to be quick assets.

The marketable securities and short-term investments such as sale securities and trading securities that can be converted into ready cash within the short term. Marketable securities are usually traded on an open market with available buyers and known prices. Any stock on the Stock Exchange would be taken into consideration as marketable security since they can be sold quickly to an investor when the stock market is open. The acid test clearly shows the company ability to convert its cash into ready cash to pay off its short-term liabilities. It is an indicator of the level quick assets to short-term liabilities.

Sony Company acid test ratio is 3. This implies that the company has much more quick assets than current liabilities. The company can pay its current liabilities without selling out its long-term assets.

Debt to equity ratio

Lower values are favorable for debt to equity ratio showing less risk. A higher ratio is unfavorable since it shows that the company depends more on external lenders, therefore, higher risk, particularly a higher interest rates. A ratio of 1.00 implies that half of the company assets are financed by shareholders' equity and half by debts (Kaplan, 2016). A value higher than one implies that liabilities are more than money of shareholders finances mostly likely assets. An increase in the trend of this ratio is alarming since it implies that the assets percentage of a business that is financed using debts is on the rise. Sony Company, the debt to equity ratio is 1. The creditors and the investors have an equal stake in the business. The company is not risky for the investors and creditors.

Inventory turnover ratio

Inventory turnover ratio refers to the ability to assess how the business is efficiently in the management of the inventories. High inventory turnover shows that the operations are efficient. When a low inventory turnover is compared to the competitors and industry average, imply ineffective inventories management. It may be a sign of either over-stocking or a decrease in demand. Overstocking can lead to obsolescence and increased costs of holding inventory.

Nevertheless, a high ratio leads to stock-out costs, that is, the business is unable to meet demand in sales because of lack of inventories. The ratio is an industry-specific ratio. Companies that trade in goods that are perishable, the turnover is very high compared to those businesses that deal in durable goods. Therefore, a comparison will be deemed to be fair between the firms existing in the same industry. It is essential in carrying out a trend analysis. The inventory turnover ratio for Sony Company is three times. That is the company will take four months to sell out its inventories and then replace it.

Asset turnover ratio

Asset turnover ratio is used to measures the company's revenues or sales value earned to the value of its total assets. The ratio can be used as a good indicator of the efficiency that the company is disposing of its total assets in revenue generation.

Asset turnover ratio is calculated over on a yearly basis either the calendar or fiscal year. The total assets number at the denominator is found by calculating the average assets that the start and end of the financial year. Generally, the higher the ratio, the better the performance of the company, because a higher ratio means the company is producing more money per dollar of assets. The ratio is usually higher for corporations in the specific sector than in others. Consumer and retail staples, small asset bases do have a high volume of sales, and therefore, lead to a high turnover ratio. Firms in specific sectors such as telecommunications and utilities, their assets bases are large and hence lower asset turnover.

Nevertheless, the ratios vary from one industry to another, putting into consideration that the ratios of telecommunication and Retail Company will not have an accurate comparison. The comparison is only important when they are within the same sector for different companies. The Sony asset ratio is 0.24. This implies that Sony generates 24 cents for each dollar in assets.

Profit Margin

Profit margin is a good indicator of how a company is profitable. It is a measure of how a company can keep in gains from the amounts of sales generated (Aaker, 2015). Profit margin is measured using percentage. To measure the profit margin of a company is essential to use the net income of the company divided the number of sales generated. The Profit Margin of Sony Company is 30% meaning that the company is making a profit. The company is profitable.

Return on assets

Return on assets shows how many cents are earned on each dollar. Higher values imply that the company is more profitable. The ratio can only be used to make a comparison of companies existing in the same industry. This is due to companies in the various industry are asset insensitive, that is, they need expensive equipment and plant to earn income than others. The ratio will be lower than the ratio of companies having a low asset- insensitive. An increase in trend tremendously shows the company's profitability is increasing. On another hand, a decreasing trend implies that the profitability of the company is deteriorating. Sony ratio is 1021.3 percent. Meaning every dollar that Sony Company invested in the assets produced a net worth of income 10.213 during the year. Regarding the economy, this is a reasonable return rate. The turnover of the Sony Company is 7.5. This means that the company collects receivables 7.5 times per year.

References

Aaker, D. A. (2015). The financial information content of perceived quality. Journal of marketing research, 191-201.

Kaplan, R. S. (2016). Transforming the balanced scorecard from performance measurement tostrategic management: Part I. Accounting Horizons, 15(1), 87-104.

Ketz, J. E. (2017). Hidden financial risk: Understanding off-balance sheet accounting John Wiley & Sons.

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