About Providing the Ratio Analysis of a Hypothetical Firm (Essay Sample)

Ratio Analysis
[Student Name]
[Course Name]
[School Name]
Ratio Analysis
In order to evaluate the performance of a company, areas that need strategies for improvement need to be identified and new strategies formed to improve performance. This evaluation includes comparing the current performance with historical performance, performance of competitors in the same industry and with businesses from other industries. This analysis goes beyond examining assets, sales and profits, it includes ratio analysis which helps in identifying, assessing, quantifying and evaluation of strengths, weaknesses, financial position and risks the company might be vulnerable to (Vandyck, 2006).
This paper provides a financial ratio analysis of Kinder Morgan, Inc. It is divided into different sections; first section describes the different financial ratios of the company (e.g. profitability, liquidity and leverage) together with strengths and weaknesses revealed by the ratio analysis. Second section provides trend analysis of the company, historical and projected. Third section has a description of comparative analysis (cross-sectional or industry).
Ratio analysis (Kinder Morgan Inc.)
There are different ratios that can be used to evaluate the performance of Kinder Morgan, Inc. as calculated by eVal. They include: liquidity ratios: (current ratio and quick ratio), leverage ratios (debt ratio and debt to equity ratio), operational efficiency ratio (net operating asset turnover, net working capital turnover and average days) and profitability ratios (sales growth, return on equity, and gross profit margin). The ratio analysis results can be compared to the ratios of companies in the same industry and with those in different companies (cross section analysis) (Vandyck, 2006).
Liquidity ratios
Liquidity ratios measure the ability of a company to meet the short term obligations such as its expenses. Current ratio measures the number of times the current assets exceed current liabilities. In 2013 Kinder Morgan had liquidity issues since its current ratio was 0.637. The value increased in 2014 and 2015 i.e. to 2.039 and 2.295 respectively. This increase shows that the current assets increased or the current liabilities reduced over the two years. With the forecasted data, the ratio remains at 2.295 showing that the forecasted values of current assets and liabilities will remain the same in future.
Quick ratio measures the number of times all current assets excluding inventory exceed current liabilities. The quick ratio in 2013 was 0.475, the value decreased in 2014 to 0.372 which shows that the assets which can be easily converted into cash reduced in 2014. The ratio increased in 2015 to 0.949 showing an increase in the value of most liquid current assets. With the forecasted values of most liquid current assets, the value remains at 0.949 showing a constant value of the current assets and liabilities.
Leverage ratios
Leverage ratios measure the ability of a company to pay debt or meet the long term obligations it has. Debt to equity ratio of Kinder was 2.671 in 2013, this value reduced to 0.307 in 2014 and 2015 to 0.263 and 0.263 respectively. With the forecasted values of long term liabilities, the value remains at 0.263. This means that the creditors will be protected in future as the lower the ratio the better the creditors funds are protected.
Operational Efficiency Ratios
These ratios measure how efficiently the company utilizes its assets and manage its liabilities. Net operating asset turnover measures how efficiently the business generates sales on every dollar of assets. In 2013 the ratio was 0.199; it reduced to 0.447 in 2014 and later increased to 1.837 in 2015. With the forecasted data, the ratio will reduce gradually over the years showing mismanagement of the company’s assets over the years. Net working capital turnover shows whether the business is spending more on fixed assets and complements tangible net worth of the business to net sales. In 2013 the days were 136.602; this reduced to 16.381 in 2014 and later reduced to 6.853 in 2015. With the forecasted data, the days will increase from year to year hence there will be need for more funding to support financial structure of Kinder.
Average days to collect receivables represent the number of days taken by the company to collect the debts owed by customers. The lesser the number of days the better since the company will have enough cash to carry out its operations. In 2013 the days were 51.689; this reduced to 25.478 in 2014 and later reduced to 0.000 in 2015. With the forecasted data, the days will be at 0.000 showing that the company will not have debts in future. Average inventory holding period is the number of days the company’s inventories stay in the sores before they are sold. In 2013 the days were 22.029; this increased to 57.025 in 2014 and later increased to 97.778 in 2015. With the forecasted data, the days will increase gradually over the years showing that the will be holding inventories for longer periods hence less sales. Average days to pay payables represent the number of days the company takes to their current liabilities. In 2013 the days were 135.158; this reduced to 53.243 in 2014 and later increased to 34.949 in 2015. With the forecasted data, the days will increase gradually over the years showing that the company will be taking longer to pay its creditors resulting to lower current and acid test.
Property Plant & Equipment turnover measures how efficiently the business generates sales on every dollar of property and equipment. In 2013 the ratio was 0.378; it increased to 0.765 in 2014 and later increased to 2.454 in 2015. With the forecasted data, the ratio will increase to 2.503 in 2016 and then reduce gradually over the years showing mismanagement and ineffective use of the company’s assets.
Profitability sustainability ratios
These are ratios that measure the profitability of a firm. Sales growth rates; in 2013 the growth rate was -13.3%, it increased to 16.5% in 2014 and later reduced to 4.8% in 2015. With the forecasted data, the ratio will increase to 2.503 in 2016 and then reduce gradually over the years showing a reduction in sales of the company therefore the profitability will reduce.
Return on equity measures return rate on investment by the shareholders of the company. In 2013 the rate was -0.484, it increased to 0.430 in 2014 and later reduced to 0.217 in 2015. With the forecasted data, the ratio will decrease to 0.206 in 2016 and then reduce gradually over the years showing a reduction in sales of the company and a high risk to shareholders. Return on net operating assets measures the amount realized on sale of the operating assets. In 2013 the rate was 0.053; it increased to 0.120 in 2014 and later reduced to 0.179 in 2015. With the forecasted data, the ratio will decrease to 0.173 in 2016 and then reduce gradually over the years showing a decline in the amount realized from operating assets.
Net profit margin represents the amount realized per every dollar of sale. In 2013 the rate was 0.811; it reduced to 0.261 in 2014 and later reduced to 0.092 in 2015. With the forecasted data, it is projected to remain at 0.092. Gross margin for the company was 0.552 in 2011, in 2012, 2013, 2014 and 2015 the value reduced. The historical data for the gross margin is consistent since there is a continuous decline in gross margin. With the forecasted data, the gross margin is expected to remain constant at 0.378.
Trend analysis
Using the hi...