Trends in financial ratios



Trends in Financial Ratios

First and foremost, Carpet Right's general direction of the market can be determined by scrutinizing the position of their common size analysis and horizontal analysis with further detail. Carpet Right's horizontal and vertical analysis shows an upright trend in 2009 compared to 2008; this is pertinent to their percentage change in Net Sales of 4.7% in 2009. This positive increase shows that eventhough their relative income is slightly higher in 2008, however their Cost of Sales (COS) has decreased by 1.6% proving to be relevant to the changes acquired during the year. Also, their Interest expense boosted to 130.3% compared to previous year resulting in higher increase in income tax expense.

Price Earnings Ratio and Dividend Ratios

Since there's insufficient information to calculate the market price share in 2008 and 2007, therefore Mark is estimated to pay 4.59 times in the market for each dollar of earnings. However the dividend payout declined in 2009 with a staggering 97.2% compared to 2008 with 112.9%.


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It can be concluded that; carpet right has been doing good in the profitability area whereby they have potential profitability growth in the future. The decrease in COS shows that suggest that carpet right has succeeded in reducing expenditure incurring higher income. However their interest expense increased 130.3%, this tells us that their company is concentrating more in acquiring non-current assets and therefore are financed by borrowed funds. Other than that, the PE Ratio advocates 4.59 times more than normal which suggests a higher PE ratio as a financially strong company. Nevertheless, the shrinking of the dividend payout implies that somehow Sarah Swift seeks attractive growth in market share prices by reinvesting her earnings internally. Comparing from the shop industry average for gross profit margin, it shows a 53% which signifies a good gross profit margin for Carpet Right (61% in 2009) that denotes increasing of profitability.


Interpretation of liquidity ratios

Current ratio and quick ratio (acid test ratio) are the means to define whether a company can meet its short-term obligation. In the financial analysis, it is evident that the current ratio escalated from 2007 with 2.96:1 to 2009 with 3.37:1. The Quick ratio also simultaneously demonstrates the same increase (2007: 2.41, 2008:2.49 and 2009: 2.69). However, both current and quick ratio needs to be above than 1 to satisfy their current obligations. This finding suggests that current and quick ratio for 2008 and 2009 are quite high in comparison to industry shop average; it also means that Carpet Right might actually become too liquid in terms of current ratio and caused by disproportionate investments of current assets.

The coloration between the current assets and current liability of Carpet Right are noticeable as the company has a vast increase in current assets and a decrease in current liability. This suggests they need not require borrowing funds from banks in order to finance the current asset investments that can decrease the profitability of Carpet Right.

The ratio for Accounts Receivable shows a favourable upward trend as it determines how many occasions the average receivables are liquidated into cash in a year. In comparison to three years, receivable turnover attained the highest by 33.8 times. Where else their Inventory turnover also raised to 14.2 times by 2009.


In conclusion; Carpet Right holds a good liquidity position when it comes to meeting its short-term obligations. This is apparent by looking at the current ratio and quick ratio, Carpet Right does not have to borrow from external party as they have efficient quick assets to cover their current liabilities, thus, they are improving financially on year to year basis. The "refresh rate" for Carpet Right's receivable turnover suggests that they have improved their debtor's collection by 11 days in 2009. This is good as the company took shorter days in reclaiming money from debtors. Lastly, inventory turnover also show positive respond as the "refresh rate" of 14.2 times a year (2009) means that they stock their shelves more often compared to previous years. They took 26 days to restock their inventory which is adequate confirming higher sales and profit generated.


Interpretation of financial stability ratios

According to Hoggert et al, financial stability ratios are associated with how the owner of the business has the ability to satisfy long-term obligations and have additional capital residual through its operations to manage lucratively (2009, p.1082). The debt ratio for Carpet Right illustrates a 32.8% in 2007, 32.3% in 2008 and 48.7% in 2009 respectively. The equity ratio conversely shows relatively lower percentage in 2009 compared to 2008 and 2007 with only 51.3%, lower than the average industry itself. The time interest earned ratio in 2008 demonstrates the highest value of 6.7 times in contrast to 2007 and 2009. Finally, their asset turnover value also has the highest in 2008 with 3.44:1.


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As a conclusion, their debt ratio shows a higher rate of 48.7% over their total assets in comparison with 2008 and 2007. This suggests that Carpet Right has strengthened their claims to the asset as Sarah probably has produced a higher percentage contribution of assets so that the company has more control over the assets than their creditors. Ironically, their equity ratio shows has decreased below average industry shop of 51.3%. This means that somehow this reflects that Carpet Right might have a slight problem in generating new finances or funds from their capital investment. The time interest earned exemplifies how many times the business will be able to pay their interest given their current profits. There's a decline in 2009 the times they could have paid the interest, this is probably due to the utilizing of more resources of their creditors than their own resulting the time interest earned value drop. Lastly, comparing to the industry average for asset turnover, Carpet Right has a lower asset turnover in 2009 as this indicates improper utilization of fixed assets to their full potential or the company is getting low income from each dollar of fixed assets.