Following up with our initial analysis last week, NewGen had the opportunity to review CanGo’s financial statement. The success of a business depends on its ability to remain profitable over the long term, while being able to pay all its financial obligations and earning above average returns. NewGen leveraged our knowledge of Investment rations, breaking our analysis down into four (4) key areas, efficiency, financial leverage, liquidity and profitability. Attached you will find our financial analysis summary matrix.
We began with a look at your efficiency ratio, concentrating on your receivables turn over for the past year. This reflects the time between your sale and actual collection. If a company’s Turnover Rate is significantly lower than industry norms, there could be an underlying reason such as poor collection methods, high-risk customers or low sales. With CanGo’s Efficiency Ratio for receivables turnover was at 1.51, there is room for improvement and a closer look needs to be performed to pinpointed where the problem lies. We next looked at CanGo’s Inventory Turnover as a measure of CanGo’s inventory management efficiency. In general, a higher value indicates better performance and lower value means inefficiency in controlling inventory levels; CanGo’s was 1.56. This lower inventory turnover ratio may be an indication of overstocking which may pose risk of obsolescence and increased inventory holding costs (Accounting Explained, 2012).
Taking a look at CanGo’s equity ratio for how much they relied on their debt, we were surprise to see a low debt to equity ratio of 7.57, thereby enabling CanGo to utilize more of their revenue for their future plans (Financial Dictionary, 2012).
Our Review of CanGo’s Liquidity included the current ratio, the quick ratio and the operating cash flow ratio or Working Capital. a. Current Ratio reflected a 1, which is low if CanGo wishes to position themselves to turn short-term assets into cash to cover debts or assist with the planned upgrades. b. Your Quick Ratio fell below a 1 to .95. As a common rule of thumb, a quick ratio of greater than 1.0 means a company is sufficiently able to meet their short-term liabilities. With CanGo’s falling below this threshold, could be indicative that your over-leveraged, struggling to maintain or grow sales, paying bills too quickly, or collecting receivables too slowly. This ties into our comments above on yor efficiency ratio (Investigatinganswers, 2012). c. Working Capital for the past year reflected a negative balance almost 8.5m that will seriously impact on banking institutions percentage against planned activities.
NewGen’s final analysis was on CanGo’s profitability looking at your Return on Assets and Sales. CanGo’s return on assets reflected a .023 indicative that your more asset-intensive and must reinvest more money to continue generating earnings (About.com, 2012). Similarly, CanGo’s Return on Sales (ROS) was .17 (Investopedia, 2012).
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