Financial analysis and evaluation is a critical tool in any company as it helps it evaluate its performance, enabling the directors to make informed financial decisions. The viability of a company heavily depends on good management of company finance in various categories, including profits, losses, expenses and liabilities. To achieve all these, the company typically incorporates ratio analysis tools to help assess and track the company’s financial performance and position. In this paper, a thorough evaluation and analysis of financial ratios are conducted to determine the financial performance and viability of the company and develop informed decisions and steps that would improve its financial stability.
Financial Ratios.
The financial ratios are generated and calculated using numerical values obtained from the company’s financial statements to achieve valuable financial information about the company. The financial statements, including cash flow statements, balance sheets and income statements, are used to execute quantitative economic analysis, which enables the company to assess its profitability, liquidity, margins, leverage, return rates and power. Financial ratio analysis is necessary for tracking the company’s financial performance and making comparative and informed decisions regarding the company’s performance.
PELOTON PTON Financial Ratios
| 2020 | 2021 | 2022 | |
| Current Ratio | 1.10 | ||
| Quick Ratio | 2.28 | ||
| Days of Sales Outstanding | 5.31 | 4.81 | 7.90 |
| Days of Sales Inventory | 70.32 | 83.91 | 129.20 |
| Days of Payables Outstanding | 42.07 | 35.52 | 28.95 |
| Receivables Turnover | 68.77 | 75.88 | 46.22 |
| Inventory Turnover | 5.19 | 4.35 | 2.83 |
| Fixed Assets Turnover | 3.71 | 4.22 | 2.93 |
| Total Assets Turnover | 0.95 | 1.08 | 0.84 |
| Gross Profit Margin | 45.82% | 36.10% | 19.50% |
| Operating Profit Margin | -4.43% | -4.67% | -45.88% |
| Net Profit Margin | -3.92% | -4.70% | -78.94% |
| Debt / Equity | 79.25% | ||
| Financial Leverage Ratio | 1.78 | 2.56 | 6.79 |
| Return on Assets | -3.72% | -5.06% | -66.42% |
| Return on Equity | -6.88% | -11.01% | -240.96% |
Innovate Corp Financial Ratios
| 2022 | |
| Fixed Assets Turnover | 6.96 |
| Total Assets Turnover | 1.47 |
| Net Profit Margin | -2.49 |
| Debt / Equity | -13.73 |
| Financial Leverage Ratio | |
| Return on Equity | -129.98% |
Company liquidity
Liquidity refers to the company’s potential to convert assets into cash. The liquidity ratios measure the company’s potential and ability to meet its current and short-term obligations without demanding external capital. The liquidity ratios consist of the current and quick ratios. Current ratios measure the company’s potential to pay and cater for its current liabilities using the total current assets. The liquidity positions have a direct correlation with the current ratio. The greater the current ratio, the well the organization’sorganization’s liquidity position. The Peloton PTON Company has a current ratio of 1.10 and a quick ratio of 2.28. A liquidity ratio indicates how many times the company can meet its current obligations using the current assets. A ratio greater than 1 indicates that the company is in an excellent financial position to meet its obligations and withstand its operations. Therefore, the company has better liquidity.
Operating performance ratios
The operating performance ratios measure the efficiency of the company’s operations in using available resources to generate cash. The ratios are important as they give an insight into the general financial health. There are multiple types of such ratios, as explained below.
Days of sales inventory ratio – this metric measures the average number of days the company takes to sell its inventory. A lower DSI is always preferred as it indicates higher inventory liquidity since the inventory is cleared off in a shorter duration. The DSI for Peloton is 129, which means that the company takes 129 days to sell the items in the entire inventory. This portrays that the company is somehow struggling to sell its inventory and may be at risk of excess inventory, leading to increased costs.
Days of Sales Outstanding (DSO) measures the average time duration in days the company takes to collect its accounts receivable. Peloton’s DSO is 7.9, which means the company takes a shorter period to collect its receivables which is a positive sign. This ensures the company is safe from debts and challenging the cash flow.
Days of payables Outstanding (DPO) is a ratio that computes the mean time it takes for the company to pay all the accounts that need to be cleared. PELOTON Company has a DSO of 28.95 which means that the company pays its debts in a short period, indicating that the company pays its suppliers in the required time.
Receivables turnover is a ratio that computes the rate at which the company collect its receivables. The higher the ratio, the quick the company collects its receivables. Peloton’s receivable turnover is 46.22, which indicates the company collects its receivables quickly, cutting debts and increasing cash flow.
Inventory turnover measures the rate at which the company sells its inventory. The 2.83 inventory turnover for Peloton indicates that the company sells its inventory at a lower rate; hence, the company may be overstocking or have poor selling strategies.
The fixed and total assets turnover ratios measure a company’s efficiency in utilizing fixed and general assets to generate cash. It equates the company’s revenues/profits to the net fixed or total assets. The lower asset turnover indicates that the company is too many expenses in fixed assets to generate a relatively lower income. Peloton’s Fixed Asset Turnover is 2.93, while the total Asset Turnover is 0.84. Moreover, the lower asset turnover ratio shows the company is not efficiently managing its assets.
Asset financing
The Debt/equity ratios measure the company’s extent in financing its operations, majorly with debts than its assets. A higher debt-to-equity ratio usually indicates more considerable risks. In contrast, a small ratio indicates minimum risks and the reluctance of the company to use debt to grow. 29.25% is the Peloton Debt/equity ratio. This shows that the business is using more resources to finance its operations. The company is likely to suffer minimal risk because the risk indicates that it uses more of its equity than loans to finance its assets.
DuPont Analysis
The ROE and ROA seem to be decreasing over the past three years. The DuPont analysis breaks down the Returns on Equity into efficiency, leverage and profitability. The analysis is significant in evaluating and determining factors contributing to ROE. Moreover, the analysis enables one to identify the areas that need support and improvement. Determination of the DuPont formula involves the multiplication of the net profit margin, asset turnover and financial leverage.
Net profit margin = 0.7894
Asset turnover = 0.84
Financial leverage = 6.79
The company experiences a low-profit margin which signifies its expenses are high than the sales hence low profitability. Moreover, the low asset turnover indicates that the company needs to fully and maximally utilize its assets to generate income. The high financial leverage suggests the company is more on debt to grow. The return on equity ratio has decreased rapidly over the last few years, indicating a decrease in profitability.
Comparison to the competitor
Innovate Corp, however, has better financial ratios compared to Peloton Company. Although not financially stable, the company is in a better financial position than Peloton. The company should reduce shareholders’ equity value and generally increase net sales.
Recommendation
Throughout the analysis, the company is not financially stable, as indicated by the high financial leverage, low-profit margin, low asset turnover and tremendous decrease in ROE and ROA. The company should lower and minimize its borrowing capacity. The company should also fully utilize its assets to ensure high turnover to generate income and maximize profits. Moreover, the company should reduce expenses and develop innovative and creative ways to increase sales. The company may also need more investors due to the low and decreasing ROA. According to the analysis, the company will likely fail in the upcoming years.
Conclusion
The ratio analysis is a crucial tool in determining a company’s financial position and sustainability. The ratios illustrate the overall operation of a company in a simplified manner, making it easy to identify the weak areas that need improvement quickly. The DuPont analysis is a framework that summarizes the whole financial status of the company and, therefore, should be regularly implemented in business evaluation in every company.
References
Hosaka, T. (2019). Bankruptcy prediction using imaged financial ratios and convolutional neural networks. Expert systems with applications, 117, 287-299.
Kliestik, Tomas, Katarina Valaskova, George Lazaroiu, Maria Kovacova, and Jaromir Vrbka. “Remaining financially healthy and competitive: The role of financial predictors.” Journal of Competitiveness 12, no. 1 (2020): 74. www.morningstar.com
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