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Wednesday, July 30, 2014

Essay on Ratio Analysis of PJ Ventures, Inc.

Ratio Analysis of PJ Ventures Inc

Aside from looking at the figures reflected on the balance sheet and income statement, PJ Ventures Inc.’s management perform the financial ratio analysis to inspect how each components of the financial statement correlates with one another. The management believes that although the operation resulted to a net income, they still have to evaluate the overall profitability, stability, financial capacity, and efficiency of strategies the management has employed during the year. After conducting the calculation, PJ Ventures has obtained the following results, which define the overall performance of the company.

PV Ventures Inc.
Ratio Analysis
Profitability Indicators
Gross Margin 48.48%
Net Margin 21.17%
Return on Assets 16.97%
Return on Equity 31.38%
Liquidity Indicators
Current Ratio 2.43 : 1
Quick Ratio 1.83 : 1
Financial Leverage Indicators
Debt Ratio .41 : 1
Debt-to-Equity Ratio .85 : 1
Fixed Asset-to-Equity Ratio .69 : 1
Management Efficiency Indicators
Total Asset Turnover 0.8
Receivables Turnover 3.9
Days' Receivables 94 days
Inventory Turnover 2.68
Days' Inventory 136 days
Fixed Asset Turnover 2.15

In terms of profitability, PJ Ventures Inc. is doing well. The gross margin ratio is almost half of the revenues generated for the past year, while the net margin ratio is more than 20%. The company has managed to utilize its assets and equity in making sales, and as a result of well-managed resources, PJ Ventures return on assets and equity are of high percentage.

In addition, PJ Ventures is a liquid company as shown on its current and quick ratio. It means that the company has sufficient fund to pay its current debts. PJ can easily converts its assets into cash and finance unexpected expenses.

Meanwhile, creditors and stockholders have a better position trusting PJ Ventures. It is because the company is very solvent, which means having the capacity to repay long-term debt. The company is financially solvent, and has a very balance financing resources. 45% of the company’s finances were from its creditors, while shareholders contribute 55% of the total assets. Also, the total resources of the company are 69% assets and 31% shareholders’ equity. It means that the company is using an asset-based operation method in making sales and income. on the company’s sales and collection strategies. Most of their collectibles remain on record for 94 days. Having a longer collection period can hamper the company’s growth and can result in cash shortage because much of the sales are uncollected for more than three month. If PJ Venture wants to expand and improve its financial wealth, the management needs to revisit its credit and collection policies and develop strategies that will improve cash collection. Moreover, the company needs to improve its selling technique because their inventory stays on the shelf for more 136 days. The inventory movement is too slow which can mean flaws on how PJ advertise their products. The management can devise marketing scheme to attract more buyers in order to maximize their profitability.

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