Q. 1. Critically Evaluate the Profitability of Insight Technologies Ltd using relevant accounting ratios, Your analysis should demonstrate a trend over a selected period of time.
Operating Profit Margin
Net profit Margin
Return on Assets
Return on Equity
Looking at the operating margin of the Insight technology we can say that it has done well in the last sixteen years. The operating profit margin of the company has increased from 76.3% to 81.3%, which is quite impressive for any organization. On the other hand net profit margin of the company has decreased over the last sixteen years; it has come down from 23.6% to 18.6% which is not a good sign, keep in mind that in 2006 company's net income margin was at 30%. There should be a reason for this downfall. If we look at the income statement of the company we could see there is tremendous increase in raw material expense which could have damage the net profit margin of the company.
Return on assets (ROA) and return on equity (ROE) had come down in last sixteen years as well. These two ratios give information about how efficiently the company is using its asset to earn profit. By looking at the past performance ROA and ROE have come down from 94.4% to 71% and 113% to 96.2% respectively. One of the reasons for this decrease could be in 1996 there was not enough competition in the market and the company was growing at that time. Hence now the company is more stable and don't have many growth opportunities at the moment.
Q.2 Richard Field has always been against the borrowing money to finance expansion. Comment on whether the company has the capacity to sustain borrowing, outlining how this should be measured.
The reason Richard has always been against borrowing the money for expanding the business, because if the business is not in a good shape, then paying regular interest charges will add up to its expenses and may burden the business. In such cases consequently, the revenue decreases, and sometimes when the firm is not able to pay back the interest amount, it is charged for penalty and thus, it may get bank corrupted.
Business tends to borrow money usually when they feel the need to expand the business. Also they feel that they are short of liquidity needs of the business (Sofianos et.al 1990, p.677). However, if Insight Technology makes a decision to borrow in order to expand then one may wonder if the company has enough capacity to sustain the borrowing. However, one of the major measuring criteria is to determine the interest charges that can be known from interest coverage ratio. This ratio enables to know that how many times a firm can make interest payments from cash flow from its operations, i.e. CFO (Gregg, 2011, p.74).
Further, there are other ways of financing the business, such as company may sell the shares in the market and can earn respective funds necessary for the purpose ...