Assignment
Consider the following scenario for this assignment: You are an external investor who is considering General Machinery as one of the potential companies for investment. Respond to the following in your initial discussion post:
1. Discuss the major issues facing the company.
2. Recommend what actions the company should take to improve its overall performance, addressing each of profitability, liquidity, gearing, activity, and shareholder return measures.
3. In what way does the Statement of Cash Flows help you to interpret the ratios and financial performance of the company?
4. What information does ratio analysis provide for meeting the requirements of the case questions?
5. Which ratios are the most important, and which ones are of limited value? Justify your choices for the scenario.
6. Why do you need to compare:
o The current year ratios with the prior year ratios?
o The ratios of competitors in the same industry or some other benchmark?
7. Other than the computations used in ratio analysis, what else is necessary to properly analyze a company for investment?
(Respond to TB Discussion)
Major Issues Facing the Company
Return on Investment (ROI) is an important factor for an investor in order to determine the amount of loss or gain as compared to that of the money invested (Van Hecke, Emsell & Sunaert, 2015). The ROI of General Machinery changes every year and its percentage is not impressive in 2014 compared to 2001. The company may not be able to provide consistent income to their investors and its operational efficiency too is questionable due to decreasing working capital ratio.
Actions to be adopted
In order to address the liquidity problem, working capital ratio requires to be increased by proper management of assets and liabilities. In addition to the management of the profitability scenario, ROI and ROCE requires to be improved and the amount of expenses on borrowed capital needs to be reduced as compared to investment.
Interpretation of Ratios and Cash Flow
Evaluation of cash flow statement of the company provides an investor a deeper understanding of the investing, operational and financial decisions of the company (Robinson, Henry, Pirie & Broihahn2015). Comprehensive assessment of ratios of the company provides an investor with information with regard to sales growth, expenses in comparison to sales, and the ability of the company to provide increasing EPS. Ratio analysis from the company's data informs the investors of the long-run plan and prospective.
Need for Comparison
Comparison of current year's ratio with that of prior years' would help to prepare meaningful forecasted data and budgets too (Madray, 2008). Profitability Ratio assists the companies to compare profit margins of similar companies within the industry and it also helps to meet the standard benchmark of overall performance (Fewings, 2013). Other than ratio analysis of company's data, balance sheet, financial reports and news will help to assess the performance from an investor's perspective.