FINANCIAL VIABILITY OF ABC CO.

--Sumit Agrawal
BBA 5th Semester
Room No. 111
#11777
Liquidity Ratio:

Current Ratio: The current ratio of ABC Co. is 1.25. The standard current ratio for a
given company is considered to be 2:1 which is more than that of ABC Co. So, ABC Co.
Its ability to meet its short term obligations isnt very good. However, we cannot
generalize this fact without knowing the kind of industry ABC Co. works in.

Solvency Ratio:

Capitalization Ratio (Debt to Capital Ratio): The debt to capital ratio of ABC Co. is 0.727
which means that, the company has financed 72.7% of its capital using debt and the rest
using stockholders equity, the debt comprising of debentures and long term loans. This
implies that the company is gaining advantage over taxation since the interest paid on
debt is tax deductible, however the company is also losing money on interest expenses
which could have been saved by using more amount of equity. In addition, each dollar of
additional debt increases leverage of the company which increases the riskiness too.
Leverage: The total debts to total asset ratio of the company is 0.769 which shows that
the company is highly leveraged and therefore, at very high risk. This might prove very
detrimental for the companys future, especially if the returns on its cost of capital arent
very high.

Coverage Ratios:

Times Interest earned ratio: The times interest earned or interest coverage ratio of ABC
Co. is 10. It is neither high nor low. A ratio of 10 shows that the company is still healthy
and is easily able to meet its interest obligations without having to burrow from the
market. It also shows the additional debt capacity the company has currently i.e. the
company is in the position to burrow additional debt, to a certain limit, from the market
and be able to meet its interest obligations easily.

Profitability Ratio:

Gross Profit Margin: The gross profit margin of ABC Co. is about 0.8 which is quite high
and it shows that the company is making good profit on sales by either controlling cost of
its inventory or by being able to sell its goods or services at higher prices to its customers.

Return on Investment Ratios:

Return on Assets: The ROA of company is about 0.315. Market rate of interest in Nepal
is about 7% and the return is fairly high than that which means that the assets are very
efficient in generating substantial returns. It shows that the company derives about Rs.
315 of return on each Rs. 1000 investment on assets which is a very high score. At this
rate, the company should consider expanding its assets by putting in more investment.

Return on Equity: The ROE of the company is about 1.5 which shows that the investors
are getting a profit of about 50% on the investments made which is a very good score.
The company will benefit with a higher ROE if it reinvests its earnings into the
companys operations without distributing much dividends to the shareholders which will
help the company to achieve a higher growth rate. One reason that ABC Co. has a higher
ROE is also that it is using higher amount of debt to finance its operations. So,
reinvesting the earnings will help decrease the leverage and make it less prone to market
risks.

The overall analysis of the organization shows that the company is performing well and has a
good growth rate. As an analyst, Id like to advise the company to consider revising its debt to
equity ratio. There is no single perfect debt to equity ratio and it is a highly debatable issue. Debt
and Equity both have advantages and disadvantages. But a company should seek the sort of
financing that will bear minimum costs and deliver maximum benefits to the company whilst
minimizing the risk that the company is exposed to at the same time.
Also, being in the stage of growth, the company should focus on retaining its earnings as much
as possible without distributing as dividends to the shareholders. This retention of earnings will
help the company minimize its expenses in interest, decrease the leverage and pose a multiplier
effect on its growth.