Finance

Overview of Financial Analysis of Company D
The financial health of an organization can be unpacked into three salient items, being profitability, liquidity and financial stability (Randall 1999).  These will be examined in detail in the forthcoming sections by adopting horizontal and ratio analysis.  Since Company D is a public company in the stock exchange, in order to provide a richer view of the organization, it is viable to also consider investors ratios, which will be done at the end of this Memo.

Profitability of Company D
Positive images are portrayed on the organization when one looks at the increases in net sales of 10.8 million (8.76), operating income by 2 million (18.20) and net earnings by 1.5 million (21.19).  Such increases indicate that the profitability of the company is getting stronger as a result of higher sales revenue and cost efficiency.  Managerial efficiency is portrayed by a number of ratios computed in the worksheet.  The return on net sales increased, which means that the net assets of the company are being utilized more effectively to generate net income.  Similarly, the return on total assets increased, which implies that managerial effectiveness in resource utilization is better (Randall 1999).  Both ratios exceed the industry average, which further highlight a sound and strong profitability.

Liquidity of Company D
On the contrary, the working capital management of the company is deteriorating as indicated by the current and acid-test ratios.  The current ratio outlines the ability of the current assets to cover the current liabilities.  While the acid-test ratio underlines the ability of the most liquid assets to cover the current liabilities (Randall 1999).  Since both ratios are declining and lower than the industry average, they present a weakness for the financial health of the organization.  At face value such a decline in working capital management is resulting by a higher increase of current liabilities (24.55) in comparison to current assets (15.01).  Further accounting ratios can portray additional factors that can unpack such deterioration in working capital management.  The inventory turnover decreased and is nearly half that of the industry average.  This means that the inventory effectiveness of management to sell the inventory is very weak.  A high level of inventory holds a number of financial weaknesses, namely increasing holding costs, higher risk of stock obsolescence and more money tied up in inventory (Randall 1999).  All such variable impose a negative effect on the cash flow and profitability of the organization.  In fact, the cash and cash equivalents of the company declined by 2 million (35.89).

The effectiveness of the credit control department can also be examined by looking at the accounts receivable turnover and days sales in receivables.  The accounts receivable turnover slightly declined and is lower than the industry average.  This means that the company is providing a higher portion of credit sales to customers, which results in a liquidity weakness.  Indeed such element may put a strain on the firms cash flow.  The days sale in receivables slightly increased but is lower than the industry average.  This outlines the average number of days taken to collect an account receivable (Pike et al. 1999).  Since it is lower than the industry average, then the credit control department is more effective in collecting debts and proposes a strength on such facet.  Therefore, despite the firm is granting more credit than competitors it is more effective in debt collection.

Financial Stability of Company D
The debt ratio is increasing, which implies that a higher proportion of assets are financed by debt.  However, such ratio is still lower than the industry average.  A company with a high debt ratio does not necessarily is a firm with a weak financial stability provided it has a sound financial performance to cover the higher financial commitments (Pike et al. 1999).  In this respect, the times-interest-earned ratio is computed to examine the ability of operating profits to cover interest charges.  A declining times-interest-earned ratio is noted, which means a weaker financial stability (Randall 1999).  However, such ratio is materially higher than the industry average, which outlines a strong financial stability when compared with competitors.

Financial Health of Company D
An average financial health of the company is noted in light of a strong profitability, good but declining financial stability and weak liquidity.  Management should emphasis working capital in order to enhance the firms financial health.

Investors Ratios
Due to the sound profitability mentioned above, the equity investment in Company D is very attractive in the market since a high return one equity is available that exceeds the normal industry figure.  However, the return on equity has declined over the past year, which may be the beginning of a declining trend.  This is a risk that equity investors will consider which portrays vulnerability in the return on investment and may present itself as a weakness for the company in the future (Randall 1999).  Stockholders that prioritize dividend returns will consider such element considerably in their investment decisions (Pike et al. 1999).  Presently this is a very positive element for the firm in the stock market.  The earnings per share of the company are significantly increasing and much higher than that of the industry average.  This means a prosperous earning potential to shareholders on a per share basis, which provides a good standing of the company in the stock market

The confidences of the stock market in the company to make future profits is slightly decreasing and is lower than that of the industry as outlined by the price-earnings ratio (Pike et al. 1999).  Therefore, the stockholders have a lower confidence on the profit generation potential of the company when compared to competitive firms.  This may reflect in a lower stock price of the company (Pike et al. 1999).  This is a weakness for the firm in the stock market.  A rising book value per share of common stock that exceeds industry average is also noted, which implies a good book value of the company to stockholders if it is liquidated (Investopedia n. d.).  Company D is therefore interesting for common stockholders that are not risk averse and highlight invest in organizations that provide good capital gains stemming from rising market share (Pike et al. 1999).