FINANCIAL ANALYSIS

Financial Analysis of Competition Bikes Inc.

Task 1

Ratio analysis

Competition Bikes, Inc.

Industry

Ratio Analysis:

Year 8

Year 7

Year 8

Ratio:

Current Ratio

5.35

5.9

4.2

Acid-Test Ratio

4.25

4.52

3.4

Inventory Turnover

N/A

N/A

3.4

No FGI. Shipped when made

Average Collection Period

43.8

43.8

32.5

Debt Ratio

45.90%

46.70%

38%

Gross Profit Margin

27.00%

27.40%

32.10%

Operating Profit Margin

1.90%

5.30%

5.20%

Net Profit Margin

0.70%

3.30%

5.14%

Earnings per Share

0.04

0.2

0.08

Return on Total Assets

0.80%

4.50%

4.80%

Price / Earnings Ratio

83.73

49.67

29

Times Interest Earned

1.77

5.27

4.24

Analysis

The short-term liquidity of firm is better from the industry average as the current ratio for the company is 5.35 as compare to industry average 4.2, at the same time it is matter of concern. Company is not using its liquid asset to generate profit that may lead the company to lower profits in future (company should maintain current ratio near industry average). Similarly, company's debts collection policies are inefficient as the average collection period is 43.8 days, which is higher than industry average 32.5 days. Lower debts collection in days means lower cash conversion cycle (The cash conversion cycle (CCC) measures the time—in days—that it takes for a company to convert resource inputs into cash flows), therefore, the company is efficient in converting its inputs into cash flows. Profitability of the firm is not good as all profitability ratios are below the industry average (John, 1996). Debts ratio of the company is also not better than industry average, i.e., industry average for debt ratio is 32.5, which is far less than competition bike debt ratio 45.90%. Furthermore, as the profitability has been decline, the interest coverage ratio has been worsening. Industry EBIT is 4.25 times more than what industry pay for interest expenses but compition bike earns only 1.77 times in 2008. The ratio analysis of the company for year 7 and year 8 are not positive and there is a sharp decline in the financial performance of the company which requires instant corrective measures and plans to be implemented by the company for positive growth in the future.

Trend Analysis

Competition Bikes, Inc.Historical Trend AnalysisDecember31, Years 6-8

Year 8

Year 7

Year 6

Net Sales

5,083,000

5,980,000

4,485,000

Trend Percentages

113.30%

133.30%

100.00%

Competition Bikes, Inc.Forecasted Trend Analysis with Year 8 as base yearDecember 31, Years 9, 10, & 11

Year 11

Year 10

Year 9

Year 8

Net Sales

5,681,000

5,471,700

5,247,450

5,083,000

Trend Percentages

111.80%

107.60%

103.20%

100.00%

Above table shows historical the trend of sales and predict sales for next three years. If we look at history, sales increased by 33.3% in 2007 but declined in 2008 by 20% (2007-2008), however, there is an overall increase of 13.3% from 2006 to 2008. On the other hand, for coming years sales has been predicted that will increase by 4% (approx) each year over next three years.

The future performance of the company is not satisfactory as it is predicted that sales will grow only by 4%. On the other hand, if we look at the previous performance of the company, sales grew by 33% in 2007 and 135 in 2008. Therefore, company should look into this issue and develop efficient marketing strategies to increase sales in the future.

Vertical Analysis

Income Statement

2008

2007

2006

Cost of Goods Sold

73.0%

72.6%

73.4%

Gross Profit

27.0%

27.4%

26.6%

General and Admin Expenses

Administrative Salaries

3.3%

2.8%

3.1%

Executive Compensation

4.3%

3.7%

3.8%

Utilities

3.0%

2.3%

2.9%

Depreciation Expense

1.6%

1.3%

1.8%

Total General and Admin Expenses

18.4%

15.5%

17.1%

Total Operating Expenses

25.1%

22.1%

23.8%

OPERATING INCOME

1.9%

5.3%

2.8%

Interest Income (Expense):

Interest Expense

-1.1%

-1.0%

-1.4%

Interest, net

-1.0%

-0.9%

-1.4%

EARNINGS BEFORE INCOME ...