Introduction
In deciding whether Tech Ltd is a company that we would buy, we evaluated the profitability, liquidity, efficiency, financial leverage and market ratios of the company.
Profitability
The profitability ratios of Tech Ltd tells the story of an improving company with healthy profitability. The gross margin has been fairly steady at a return of around 16% for the past 2 years, and the net margin is showing that the business has become more efficient at generating profits from sales, increasing from 4.8% in 20x3 to 5.4% in 20x4, showing an increase of 15%.
Assets are being used more efficiently in the generation of profits, having increased by 18% in 20x4 meaning that they are now being utilised at their most efficient rate in the past 4 years. This efficient use of assets and increase in the net profit margin come through strongly when looking at the return on equity, which has increased by 24%, which is a very good sign showing an increase in value of the business.
Liquidity
The current ratio has been declining over the years, although it has not experienced a dramatic decline. The ratio of 1.7 in 20x4, is telling us that the company would be able to pay off short term liabilities with their short term (current) assets. However, the acid test ratio of 0.7 shows that the company ‘s current assets, excluding inventory, cannot cover current liabilities.
Efficiency
The efficiency of Tech Ltd in producing, selling as well as making and receiving payments has shown improvements over time. Both the fixed and total asset turnovers have been relatively constant over the past 4 years, with the total asset turnover increasing gradually every year. This shows us that the rate at which new assets have been purchased has not had an adverse effect in the ability to generate sales from fixed assets, and the number of days that this stock is kept on hand has been decreasing over the last 3 years which is a good sign, following the