Essay About Profitability Ratios And Financial Ratios

Bodie Industrial Supply Inc.
Bodie Industrial Supply Inc. Financial ReviewAs a new and upcoming business, Bodie Industrial Supply (BIS) is a full-service distributor of top of the line, brand name, new and used certified machine tools, maintenance parts and related equipment for the construction, utility and farming markets. Growing into a larger business, we will need to compare pro forma financial statements and ratios and analyze using Sustainable Growth and the C’s of Credit model.To quickly explain financial ratios, the 4 specific ones to be talked about during this review will measure the company’s financial performance in comparison to the industry. In short, profitability ratios measure the overall effectiveness of a business by comparing profit levels with revenue, assets, and equity. Liquidity ratios measure the firm’s ability to turn assets into cash to meet its short term cash obligations. Efficiency ratios evaluate how efficient managers use the assets of a business. Stability ratios evaluate the capital structure; the ability to service its debt from borrowed funds. Profitability        Within the profitability ratios, the gross margin from 2004 has slightly decreased into 2005 but has stayed steady from this point on. Having said this, BIS is still under the industry average meaning that they have to increase their operating efficiency in order keep up with the other businesses. Due to amortization an interest expense, there was a slight drop in Net Profit Margin.[pic 1]Liquidity         It is most concerning that all three liquidity ratios are dropping each year, some below industry average. Current ratio has gone from a 2.63 turnover rate in 2004 to below the industry average of 1.26, this means that the current assets are decreasing and/or current liabilities are increasing. Another alarming decrease is the quick ratio (acid-test ratio), this decrease shows the inability to convert inventories into cash.[pic 2]        Efficiency         A decrease in inventory days as well as accounts receivable days shows that they are moving inventory out of their warehouse faster than 2004 but not keeping up with the industry average. Within the Cash Conversion Cycle, from most recent years, it is projected to increase because they are paying Accounts Payable faster than the 2006 year.[pic 3]Stability        Due to their increasing amount of debt, Bodie can’t keep up with the industry average but is increasing each year from 2004. Times Interest Earned Ratio is slowly increase keeping up with the industry, this means they are gaining ability to honor its debt payments. [pic 4]