Quick/Acid Test Ratio
= (cash + accounts receivables + short-term investments or marketable securities)/ current liabilities
Analysis of liquidity ratios
From the above-calculated liquidity ratios indicate that the firm can pay its short-term obligations when they fall due. It is evident from the current ratio that the company can pay off its short-term obligations using its short-term effects and remain in operation. As such it can be able to finance its operations. The acid test ratio shows that the firm can ride out any form of business outturns that may happen to the company. On the same note, it means that the enterprise can be able to pay its short-term liabilities using its most liquid assets.
Debt Management Ratios
Debt to assets ratio
=total debt/total assets * 100%
Debt to equity ratio
=Total debts (total liabilities)/ Total Equity
Times interest earned ratio
=Earnings before Interest and tax/interest expense
Analysis of debt management ratios
The debt to assets ratio is mainly used to show how much of the assets are financed with the use of debts. In the above case about 50% of the assets are financed by the use of debts. As such, the company operates in a suitable financial position and should not be worried about bankruptcy. The ratio also implies that the rest 50% of the assets are financed by the owner's equity and funds from investors. The debts to equity ratio show that 35.25% of the capital structure of Samsung is debts while the rest comprises of the shareholder's equity in the company and investments. By looking at the interest earned ratio, it is evident that Samsung can be able to meet its interest expenses 33.69 times. it is used to imply that the firm is in good financial position.
Assets Management Ratios
Receivable Turnover Ratios
= sales/account receivables
= 177,365,404/ (2953549+22246995)
= 7.035 times
Receivables collection period
= 365/inventory turnover
= 52 days
Inventory Turnover ratio
= cost of goods sold/inventory
= 6.564 times
Inventory conversion period
=365/ inventory turnover
Accounts receivables turnover measures how the company manages its accounts receivables and its credit policies. The turnover ratio of 7.035 times implies that the company can collect its debts from its debtors 7.035 times better than expected. The company has a credit policy of net 60, and the fact that the average for debt collection is 52days implies that Samsung can collect money owed to it on time. The ratio of inventory turnover indicates that the management at Samsung is doing a good job in managing its inventory and turning and ultimately selling it. On the same note, Samsung has an inventory conversion period of 56days. As such, it takes an average of 56 days for the company to remove assets from it shelves to the customer. Since Samsung deals with durable commodities, Samsung can sell its commodities on time which is an acceptable condition for the firm. The inventory conversion period is acceptable.
Gross Margin Ratio
= Gross margin/net sales
=net income/net sales
Return on assets ratio
=Net Income/Average Total Assets
Return on equity
=net income/ shareholders' equity
The ability of a firm to be able to generate profits from the investments of the shareholders is known as return on equity. From the above calculation of the ROE, then it is indicative that the firm can obtain profits from the investments 21.236 times. The return on assets ratio shows how much Samsung can produce part of the income by the use of total assets. As such Samsung manages its assets to produce 8% of the total profit. The profit margin ratio indicates that 9.49% of the sales makes up the net income. The margin ratio, on the other hand, measures how profitable Samsung can sell its inventories. A ratio of 38% shows that the company is selling its inventory at a higher favorable rate.
The following information relate to industrial performance of the wholesale electronic business in 2015 according to Bizstats (2015)
Industry Financial Ratios
Return on Sales 0.22%
Return on Assets 0.26%
Return on Net Worth 0.47%
Quick Ratio 0.98
Current Ratio 1.33
Inventory Turnover 0.00
Assets: Sales 0.84
Total Liabilities: Net Worth 0.82
Comparison with the company
The present ratio of the company is 2.147 while that of the overall industry is 1.33. It shows that Samsung is in a better financial position to pay off its short-term debts when they fall due unlike the other companies in the industry which would face difficulties in debt paying. As such, Samsung is in a better liquidity position that its average competitors. The quick ratio of the industry is less compared to that of Samsung, which implies that Samsung can pay off its obligations using the most liquid assets more than the competitors. By converting the return on assets of Samsung, then the company is in the unfavorable position since it is 0.15% which is lower than the industry figure. As such, the competitors are having more returns on their assets than Samsung. As for the inventory turnover, Samsung can get more than the average industrial inventory turnover. In percentage form, the return on equity will be lower compared to that of the industry. Which implies that the firm may miss out on new investors who feel that they will get more if they invest their money with the competitors.
Comment on the firm and recommendations
One main strength of Samsung is the fact that it does not have to wary about the possibility of bankruptcy shortly since its liquidity position is favorable even if compared with the industry. On the same note, the debt to equity ratio shows that the company can be able to pay off its debts adequately. However, when compared with the industry, Samsung seems to be struggling as the returns on investment is lower thus scaring away investors. Investors invest where they feel their money is safest. As such, the company should ensure via the management that they improve their management of investments to increase the return on investments thus attracting more investors which will further reinforce the liquidity of Samsung and add on the equity levels.
Bizstats, (2015). "Industries Income expenses statements and financial ratios." Bizstats. Retrieved from http://www.bizstats.com/corporation-industry-financials/wholesale-retail- trade-41/wholesale-electronic-markets-and-agents-and-brokers-425/show
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