After carrying out a ratio analysis of Sears Holdings corporation , a number of inferences can be drawn. The firm is operating profitably as the profitability ratios surpass the industrial average. However, the trend is declining. The restaurant however is not financially stable owing to its low current, quick and debt ratios. But on the other hand it is effectively utilizing its assets to generate sales revenue. It has high inventory and accounts receivable turnovers compared to those of the industrial average. The management ought to improve the restaurant’s profitability through a cost reduction mechanism.
They also need to invest in projects that generate positive net present values for the benefit of the shareholders. INTRODUCTION This report on financial ratio analysis is aimed at measuring the general performance of the restaurant. The ratios would help users to get an in- depth understanding of the restaurant’s profitability, financial stability and efficiency with which it is utilizing its assets to generate sales revenue. For the management, their objective would be on how to improve on poor areas and maintain good performance.
Its intended users are: the management of the restaurant, customers, employees and the government, who would use it for taxation purposes. The sources of the data used have been the published financial statements i. e. the Profit and loss accounts and the balance sheets of the past four years. The restaurant specializes in the sale of foods and drinks to a wide range of customers. Part 1 On liquidity, the current ratio indicates that the firm was not financially stable only in 2007 and 2008. This ratio was 1. 53:1. This means that for every $1. 53 of current assets there are only $1 of current liabilities.
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The recommended ratio is 2:1 i. e. current assets should be twice as much as current liabilities. But in this case, they are less than twice the current liabilities. Compared to the industrial average ratio of 2:1, the Sears holdings is not better of. Through the years 2007 and 2008, its financial stability declines as shown by the ratios 1. 53:1 and 1. 34:1 respectively. The quick Asset Acid test ratio also declines from 0. 55:1 in 2007 to 0. 3:1 in 2008. The ratio indicates how able the firm is in meeting its financial obligations from the most liquid assets.
It shows that the firm is weak in it liquidity. Should be there Technical default then the company be in the woods that it will go under. There is also no an improvement of the debt ratio it falls from 61% to 58% from 2007 to 2008 respectively The debt ratio is an indicator of the percentage of current assets that have been financed through borrowed capital. It means that in 2008 58% of the total assets were financed through debt and 2007 they were 61% respectively. It means the firm might be financing its assets using internal means like retained earnings that are less costly to the organization.
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