Liquidity
Generally, what is the company's ability to meet obligations as they come due? Unfortunately, all too often in financial analysis, companies get so caught up in the details that they miss the "big picture"; that is what will be derived from this report. The most important component of a company's short-term success is liquidity — the ability to pay bills. Liquidity is a measure of the firm's cash position and it keeps a company in business in the short run. Although the firm's net profits increased significantly this period, liquidity conditions have not improved. In fact, overall liquidity has declined since last period. It seems as if there may have been some "Balance Sheet" transactions that contributed to the fall in this area. It is important to determine what factors may have influenced any declines in the firm's liquidity position, especially because the company's liquidity position is only about average for the industry in which it operates. The firm may want to keep driving in more profits and find ways to retain more income in the business. The company seems to be proficiently managing its receivables and payables. Both its accounts receivable days and accounts payable days statistics are lower than industry averages, which, over time, means the company is managing accounts well. Inventory is a relatively significant part of the Balance Sheet so watch the inventory days number closely in the future. Here are some of the possible ways management might be able to boost liquidity: Charge interest on accounts receivable that are past due Use a monthly payroll schedule if possible. Speed up the billing cycle by billing customers earlier. Even small improvements here can boost liquidity. Where possible, use electronic funds transfer (EFT) to collect money from customers. Use as much trade credit as possible. Trade credit comes in the form of accounts payable, which is attractive financing because it usually doesn't carry interest charges. Only give credit to credit-worthy customers. Also, the company should give different credit terms for different customers based upon credit-worthiness and the overall relationship involved.
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Profits & Profit Margin

Net profits and net profit margins have moved up from last period. Even though sales fell, the company has earned more cents of net profit per sales dollar and more total net profit dollars — a very good combination. The company seems to be managing sales better, which is important considering that sales dropped. More importantly, the net profit margin is generally strong. This specifically means that net profitability is excellent as compared to other similar companies. From the graphs, you can see that the company's net profits are good in raw financial terms and even superior to the earnings of its competition.

The company also performed well in the gross profit area. Gross profits increased because the gross profit margins increased quite significantly. It appears that the company may have found a way to cut the costs of sales (direct costs) significantly as a percentage of sales. The cost of sales is now fewer pennies per sales dollar than last period. From a more practical view, even though sales fell, gross profits rose because of savings in direct costs.

It is rare when gross margin performance and net profitability performance both improve as sales decrease. It might be interesting to assess whether the company can continue to improve profitability through decreased revenue performance over the long run — it could be that the company's optimal profitability range is at lower sales levels, although this is rare for most companies.

There are also other ways to increase income: 1) It would be a good idea to assure that managers are getting the internal reports needed to make good decisions-reports that include the key performance indicators (KPIs), which are the figures that are critical to a company's performance. 2) Managers may want to examine overhead costs, item by item — are there ways to reduce them? Remember, a dollar saved in expenses can be worth at least three dollars of sales made.

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Sales have fallen this period. In this particular case, this also means that the company is now generating fewer sales per employee and per fixed asset dollar. This could negatively affect net profitability eventually, if sales continue to fall in the future. Typically, companies want to see revenue moving higher between most periods. This is true because the cost of business continually increases, no matter what the inflation rate is. Of course, as mentioned in the last section, managers will want to look for longer-term results in this area — profitability is more important than sales generally.

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Even though net profitability has improved considerably from last period as already discussed, there is a slight concern with the results in this area: total debt has grown significantly faster than profitability, which could be a troubling trend if it continues. The long-term goal is not only to keep improving profitability, but also to make sure that improvements in profitability outstrip growth in debt over the long run. Otherwise, over time the company could end up with too much debt for its profitability level.

Although the company's trend of debt and profitability does not seem positive, it should be noted that the company has derived enough cash flow from operations to meet interest or debt expenses. Also, this has been accomplished while the company's level of debt is relatively high in comparison to its level of equity, which is positive for the time being. This finding is interesting because it is not a typical situation. Often, companies that are highly leveraged with a relatively unfavorable trend of debt and profitability would also have poor coverage ratios. Therefore, in this specific case, we would need to balance these considerations against the company's overall score.

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The company did very well with its fixed assets: approximately the same level of assets was used to considerably improve net profitability by 100.93%. This means that more resources such as assets were not required to leverage profitability, at least during this period. Generally, the company should be pleased to improve profitability on about the same level of assets. Typically, good companies should try to keep both expenses and assets as low as possible. This is because lower asset levels improve the return on assets, which increases the company's ability to borrow profitably.

It is also positive to see above average returns on assets and equity, since these metrics are of critical importance to external and internal investors. The fixed asset ratio of the company is high as well, which means that the company is driving an adequate amount of revenue through each dollar invested in fixed asset. Performance in this area is quite balanced.

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This company did very strong work in this area. Net profitability has improved significantly, and the company has done this with relatively the same employee and asset bases. Essentially, this implies that the company is managing the business more effectively — it is managing its resources better. It also means that the key to success (at least in the short run) may be "off the books" — may involve factors other than assets or employees. This is because both the company's assets and employee base stayed relatively flat — the company did not require much more of them to improve net profitability. Simply, the company is improving the amount of profitability driven through existing resources, which is excellent.

Managers should think about how net profitability improved without increasing assets or employees. This may be the way the company will want to expand in the short run because it will not generally involve the larger types of expenses.

A NOTE ON SCORING: Each section of this report (Liquidity, Profits & Profit Margin, Sales, etc.) contains a star rating which measures the company's overall performance in the area at the time of the report's generation. One star indicates that the company is below average or may possibly need improvement in the area. Three stars indicate that the company is about average for the area. Five stars indicate that the company is above average or performing approximately well in the area.

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