The gross profit margin made it possible to determine how the company could sell the profit greater than its production and labor value. For every dollar Abington-Hills spent, they received a 25% return. The revenue generated from this 25 cent return and thus made it possible for the company to pay for expenses such as the administrative expenses and the interest expenses. The company showed great performance in the area of its operating margin. From each dollar sale, the results showed that the company would earn a small amount previous any interest or taxes. Although, there was a 10% decline in terms of the operating margin ratio, which creates hesitation on my part before investing in this company. The net profit margin was used to determine how much monetary funds were left to the owners post all the expenses as well as taxes, this was very low coming up to around 5% after all sales. I was lead to believe that because of these three ratios which were not in favor of Abington-Hill Toys, I should not invest in their company.
The financial ability of a company to be capable of paying off interests on a debt is determined by the interest coverage ratio. Abington-Hill Toys showed to have an interest ratio of about 318%, showing that they are financially capable of paying off their debts. This was a reason to lend the company money.
The company showed to also be financially capable of generating a moderate return from its fixed-assets investments through the company’s fixed asset turnover ratio. This included the plant, their property as well as their equipment. Although, using the asset turnover ratio, the company came out performing low. This low ratio shows that revenue is not adequately generated per dollar on their assets. Because of this, the company’s inventory turnover (which is used to determine how efficiently a company can sell their inventory) showed a strong 800% for their ratio. The company, however, does not show to earn large amounts of money from fixed assets; however they do show that they are able to quickly sell their products – this is reason to lend money to Abington-Hill Toys.
Abington-Hill Toys’ accounts receivable showed that the company performed well in this aspect. Debt is collected within 36 days, which makes investing in the company more desirable. The current ratio of Abington-Hill Toys showed that the company was not capable of meeting short-term debt due dates. It computed to a low ratio of 0.9655 which demonstrated that the company had problems in liquidity also that it would have to overcome a financial crisis. This creates reason for not lending money to the company.
The company would be deemed incapable of paying a current debt if they experience an unexpected drawback, especially with a low ratio. This was determined by using the quick ratio. The company would not have sufficient liquid assets to cover such things. This makes the company highly dependent on inventory sales to produce revenue. Abington-Hill Toys, because of this reason would not be a good company to lend money to. Abington-Hill Toys has a debt ratio of 4.2857 which shows that the company is not financially healthy. This means that they have a greater amount of debts as compared to their assets. This makes the company very undesirable as an investment.
The return on asset is to determine if a company can start a new project or not. The company has to be able to show that it is capable of projecting a return which can cover expenses as well as amount to a significant influx of cash. Abington-Hill Toys showed a low return on asset rate of 0.504, which leads me to decide against loaning money to the company. The ratio which worried me the most was the Z score. Abington-Hill Toys shows that it is running a risk of insolvency in 12 months, which was a little over 90%. This fact made me decide not to lend money to Abington-Hill Toys.
I would decide not to lend money to Abington-Hill Toys of any amount because of the results I reviewed. A restructure of debt would be the only way for me to loan the company any monetary funds. Even though the company did perform well in some areas, it is not enough since its financial planning lacks structure. Although the company’s inventory turnover is efficient, and there is a normal return for the revenue generated in each dollar spent, if ever the company runs into a financial crisis, it would not be able to financially handle this. The company shows that they will not be able to return if ever forced to pay their short-term debts, expenses and interests. They simply do not have the sufficient cash flow to do this with a low 5% net profit after expenses and taxes.
The company would heavily rely on sales to keep their company stable if ever they run into an unexpected financial crisis. The company has been declining according to balance sheets from its current and previous years. I would not lend money to the company, unless there was a way for them to reduce their short-term debts and increase their returns on assets. Abington-Hill Toys may pose as a liability to my finances because of what showed in their financial data, there is great possibility that Abington-Hill Toys will fall subject to bankruptcy.