Assess the condition of the company using ratio analysis, including key ratios and a Dupont analysis. Financial ratios can be used to evaluate the overall condition of Sample Co. First, ratio analysis will be conducted on profitability, activity, leverage, market price and dividend payout using the financial statements from years1999, 2000 and 2001. Keep in mind that ratio analyses only give a picture or trend of the company's financial status.
The first question to be answered is the profitability of Sample Co. Using the Dupont Model, return on investment (ROI) for Sample Co. is 13.1% in 2000 and 21.6% in 2001, for an increase of 7.9%, the margin is (net income/sales) 8.9% in 2001 and 5.9% in 2000 for an increase of 3% and turnover (sales/average total assets) is 2.43 in 2001 and 2.20 in 2000 for an increase of 0.23. " for most American merchandising and manufacturing companies, is between 7% and 10%. Average margin, based on net income, ranges from about 7% to 10%. Using operating income, average margin ranges from 10% to 15%. Asset turnover is usually about 1.0 to 1.5."" (University). .
Another profitability ratio is return on equity (ROE). In 2000, the ROE for Sample Co. is 10.4%, and 25.6% in 2001, for an increase of 15.2%. "Although many valid exceptions exist, a very broad rule of thumb useful for putting ROI in perspective is that average ROI, based on net income, for most American merchandising and manufacturing companies, is between 7% and 10%- (University). The ROE in 2001 is significantly higher than 2000, and the national average.
Next, activity measures are needed in evaluating Sample Co., average days' sales, is the one measure in this area. In 2001 average days' sales is $28.38 million per day and $22.61 million in sales per day in 2000, for an increase of $5.77 million per day in 2001. This appears to a significant increase of average days' sales or a increase of $2,108 milling in one year.
