Efficient management strategy reflects in the gross profit sales which increased in the year 2008 with 23% as compared with the year 2009. In the year 2009, RAP Ltd. hasn’t focuses on reduces the cost of goods sold which gives a slightly negative reflection on the gross profit. Slight decrease in the year 2009 gross profit because of economic recession in the economy reflects on the gross profit of RAP Ltd. Moreover, RAP Ltd. high ratio of COGS in the shape of FOH, Purchases etc and also due to internal restructuring.
On the whole the gross profit margin is fair enough and one should hope that the percentage of gross profit margin will increase in years to come Meigs (1999). NET PROFIT MARGIN The profit margin on sales ratio tells us the ability of the firm to convert its sales into profits. A low profit margin on sales indicates high expenses which consume most of the revenue earned by the firm. In such a case, the firm needs to analyze and point out areas which are producing more expenses than usual. The higher the ratio, the better it is for the company.
From the perspective of RAP Ltd. there is a slightly negative moment is reviewed in the year 2009. RAP Ltd. net profit margin in the year 2009 is 12% because of margins in selling, administration expenses and Distribution costs. In that case RAP Ltd. still has a room for improvement in the net profit margin Garrison (2004). Moreover in the year 2009, because of rough economic and business condition, RAP Ltd. efficient business running strategy hit badly in terms of net profit margin. It is viewed that Net Profit margin rate will increase in years to come.
The management strategy has helped generate more revenue but there has been significant impact made on the net profit Myers, Brealey and Marcus (2001). LIQUIDITY CURRENT RATIO The current ratio tells us about the liquidity of the company. It is the ratio which tells us the company’s ability to pay off its liabilities using the current assets in case the company is liquidated. Higher the current ratio, the better it is. RAP Ltd. current ratio is slightly on the lower side in the year 2009 in comparison with the year 2008. This ratio indicates a higher margin of safety with respect to meeting current obligations.
RAP Ltd. current ratio will not allow them to take more debt as compared to previous years practices. RAP Ltd. current ratio haven’t strong current ratio and its gives a not a strong and positive signal to the creditors that company’s business operation is running on a right path. The current ratio of RAP Ltd. suggests that company have not sufficient and ample reserve cash or liquid asset and RAP Ltd. can’t utilize the excess or reserve cash on their ongoing business. QUICK RATIO RAP Ltd. quick ratio is not better in all the two years period.
Although, RAP Ltd. has a higher inventory but improper maintenance of working capital management strategy has also a hurdle in order to produce a healthy quick ratio. In addition, RAP Ltd. quick ratio gives a negative signal to the market, indicating that there is a liquidity problem for RAP Ltd. Besley, Brigham, Scott, Eugene F. (2001). EFFICIENCY STOCK TURNOVER PERIOD RAP Ltd. is able to convert its inventory into cash every 59th day in the year 2009 and 55th day in the year 2008, which is not good going for the company in comparison with the previous years.
This shows that RAP Ltd. is better at managing its inventory especially in the years 2008. RAP Ltd. inventory management strategies make a strong reflection on this ratio and it is evident that company’s operating cycle is slightly high in comparison with the previous years which are fair practice as far as company’s perspective is concerned. RECEIVABLE (DEBTORS) DAYS Receivable debtors’ days tells us the average number of days it will take to recover the accounts receivables balance.
This allows the investors and the management of the company to analyze the effectiveness of the current credit policy and its implementation. Slow collection period increases the probability of bad debts and this important factor make a reflection on the RAP Ltd. average collection period. RAP Ltd. has employed an effective credit policy for its customers and adopted an aggressive credit policy to collect their receivables. CAPITAL STRUCTURE DEBT TO EQUITY Dependency on debt financing is not a bad habit but it has consequences if you rely on more. RAP Ltd.
debt to equity ratio is on the lower side in the year 2009 in comparison with the year 2008 due to the factors of business volume, increment in sales, fulfilment to pay the suppliers and acquisitions of fixed asset. Due to the expansion in business, RAP Ltd. has plenty of financial obligations, most of which has been acquired through equity. DEBT TO ASSET RAP Ltd. D/A ratio, is around 12% in the year 2009. In the year 2008, the debt to total assets is around 14% which is good as far as the performance is concerned. The year 2009 is worst for RAP Ltd.
, the main reason behind is the improper utilization of debt in order to capitalize assets. Moreover, it also reveals the fact that the management of the company can’t generate more assets in response with the debt. A higher D/A ratio would place the company under increased amount of risk, especially if the interest rates are rising. Hence, a lower D/A ratio would be more desirable Besley, Brigham, Scott, Eugene F. (2001). INTEREST COVERAGE RATIO This ratio helps the analysts analyze the ability of the firm to pay interest on the debt.
This ratio is especially of concern to the creditors of the firm or the banks who are interested in providing debt financing to the firm. If the company is able to pay its interest expense, only then it is able to obtain financing. The TIE ratio of RAP Ltd. is satisfactory since it is showing a high earning before income and tax. TIE ratio is concerned it looks healthy as far as company’s future operations are concerned and it also gives an indication that debt holders are not concerned about the company’s performance because RAP Ltd. has reported an excellent TIE ratio through out two years.
It is a good signal for the company’s perspective (Besley, Brigham, 2001). RECOMMENDATIONS My recommendations are stated below: • Design the Internal control system that really helps in the company’s financial policies. • Formulating and implementing the corporate strategy which determines the company’s mission and objectives and also oversight the risk associated with. • High cost of sales make a negative impact on the gross profit and also the raising variable and fixed cost cut down the profit so the company take all necessary step to continue the same practice.
• Company also making the strategy to utilize all the assets at its optimum level and not should eyeing on the fact that no asset remains idle. Moreover, company focuses more on capital expenditure. • High leverage and dependency on debt financing create an alarming situation for XYZ Inc because in this current scenario current ratio is slightly weaker and it not gives the right signal to the debt holder. Current Asset can’t generate the income in away that reflects in the current ratio.
All in all, not out of the woods but small improvements in sales and margins and return to basics could translate into more upside. CONCLUSION RAP Ltd. portrays a very strong and positive position in the markets place and without doubt this company has an ability to challenge its rivals to have a girds to become the market leader. There are certain areas where RAP Ltd. should pay attention to like in the area of working capital, net profit margin, reduction in revenue expenditures on consistent basis and assist in increase its investor’s confidence towards the organization.
C. The limitations are stated below: • The implementation of different accounting policies might distract the reported figures. Like frequently made changes in depreciation methods, in inventory valuation technique etc (Besley, Brigham, Scott, Eugene F. 2001, p. 98). • If the reported figures on financial statement are out of date then the ratio can’t portrait the true picture of the company. • The ratio are also not debated on the risk associated the figures.
• If the employees or the management of the company manipulated with the figures or uses the big bath accounting technique or uses window dressing techniques then the ratios are also not clearly projected the company’s performance. (Besley, Brigham, Scott, Eugene F. 2001, p. 98) • Ratios are also not clearly drawn the valid projection of the company’s capital structure or the size of the company’s business (Besley, Brigham, Scott, Eugene F. 2001, p. 98). • It is the reality that inflation distorts the reported amount. Ratio are not provides any appropriate judgment over the issue related with inflation.
• The factor of risk is beyond the control of ratios and the ratios are provides any proper evaluation related with risk. REFERENCES Besley, Brigham, Scott, Eugene F. (2001). Principles of Finance. Florida: Harcourt College Publishers. Brealey, Richard A. , Stewart C. Myers, Alan J. Marcus (2001). Fundamentals of Corporate Finance. 4th ed. New York: McGraw-Hill. Garrison, Ray H, Eric Noreen, Peter C. Brewer (2004). Managerial Accounting. Meigs, Robert F. , Mary A. Meigs, Mark Bettner, Ray Whittington. Accounting: the basis for Business Decisions. 11th ed. New York: McGraw Hill