Financial Analysis of Strong Tie Ltd. 2006-2008
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MEMORANDUMTO: Mr. David JohnstoneFROM: ManagementDATE: March 26th 2018SUBJECT: Financial Analysis of Strong Tie Ltd. 2006-2008LIQUIDITYAnalyzing Strong Tie’s liquidity and debt payment you’d first look at its quick ratio which declined from 3 to 1 in 2006, to 2.4 to 1 in 2007 and 1.7 to 1 in 2008. With a 3 to 1 ratio Strong Ties was above the industry average and had good liquidity. Now Strong Tie’s assets to liabilities ratio is 1.7 to 1 which isn’t terrible but still runs the risk of having a shortage of cash. There, receivables turnover was relatively high at 73 days but is now decreased to a 63 days which is average for the industry. This needs improvement to build better customer relationships and increase sales. ASSET MANAGEMENTStrong Tie Ltd generated $1.91 of revenue for every $1 of assets in 2006. In 2007, it decreased to revenue of $1.41 per $1 of assets, and in 2008 it further decreased to revenue of $1.31 per $1 of assets. Needless to say, Strong Tie Ltd.’s asset management is declining over the past 3 years. Looking at A/R turnover from 2006-2008 Strong Tie receivables were 36.57 days in 2006, 72.16 days in 2007, and 63.13 days in 2008. Analyzing that information, you can see that although A/R collection improved in 2008, it still didn’t compare to 2006. Strong Tie Ltd. needs to find a way to be more efficient in collecting their receivables.
LONG TERM DEBT MANAGEMENTLooking at Strong Tie’s long-term debt, assets have increased in the past 3 years at a rate of 5.4%. Indicating that Strong Tie’s is becoming more financially risky, but still has relatively low debt built into it finances. We know this because in 2006 their debt to asset ratio was 41.7% compared to 2008 when it was 47.1%. Strong Tie’s long-term debt to total capitalization is steadily increasing moving from 32.29% in 2006 to 37.9% in 2008, putting it above the industry average in 2008. With that trend along with their cash flow coverage ratio decreasing dramatically, the high risk and possibility of running out of cash to operate is evident. PROFITABILITYReviewing the vertical analysis of the balance sheet, the gross profit on sales is decreasing from 2006-2008. Looking closer it is declining by roughly 4% percent yearly. This indicates Strong Tie is losing net profits slowly, but despite their slow decline the company can improve profitability with a few tweaks. Return on assets are decreasing at a dramatic pace of 5 to 7 % percent yearly. In 2007, the operating income was $1644. In 2008, it decreased to $415. However, the total assets were almost the same in both years, so the company was more efficient. The return on sales, it is also decreasing at a large rate over the years. The operating income as a percentage of sales is relatively low and has fallen between the three years. This is not a good sign.