Debt and Equity Financing - Advantages and Disadvantages Research Paper

Debt and Equity Financing - Advantages and Disadvantages - Research Paper Example It is of great significance that the ratios must be benchmarked against a standard in order for them to possess a meaning. Keeping that into account, the comparison is usually conducted between companies portraying same business and financial risks, between industries and different time periods of the same company. The company under consideration is Marvel Toys, and in this report the analysis of the financial performance of the company over the last seven years has been conducted in order to draw attention to various financial trends and significant changes over the period. The analysis is divided into three main categories: namely Profitability, Liquidity and Gearing. Profitability ratios identify how efficiently and effectively a company is utilizing its resources and how successful it has been in generating a desired rate of return for its shareholders and investors. Liquidity ratios measure the ability of the company to quickly convert its asset into liquid cash to settle its sh ort term liabilities. Whereas, the Gearing ratios identifies the extent to which the company is financed through debt and to what degree the operations are being conducted from the finance raised through raising equity capital or otherwise2. Following ratios have been used in order to evaluate the financial outlook of the company: Current ratio Acid-test (quick) ratio Collection period Inventory turnover Debt to total asset ratio Times interest earned Return on assets Return on Equity Fixed Asset turnover Total Asset turnover Gross Profit margin Net Profit Margin The profitability ratios of the company appear to be stable, but the company is facing liquidity problem as apparent from the ratios. Also, the company has more than 50% of its assets financed through debt. But the company has great earning potential based on which it has been decided to sanction the long term loan facility to the company. Answer to part A Financial Analysis Profitability Ratios    2011 2010 2009    Pro fitability Ratios Gross profit margin 20.18% 19.23% 20.14% Net profit margin 6.88% 6.15% 7.50% ROE 11.68% 12.20% 35.71% ROA 4.50% 4.36% 7.03% Fixed Asset Turnover (times) 2.04 2.27 2.53 Total Asset Turnover (times) 1.27 1.35 1.57 Gross profit margin is an analyzing tool which assists in identifying how effectively and efficiently the company is utilizing its raw materials, variable cost related to labor and fixed costs, such as rent and depreciation of property plant and equipment3. The ratio is calculated by dividing the sales revenue by the gross profit. The gross profit margin of the company was quite stable in the financial year 2009, but moving forward in the financial year 2010, the ratio has seemed to decline a bit. The decline in the ratio was primarily due to the decrease in the net sales of the company by 9% which caused the gross profit margin to decrease by around 0.91%. But the ratio appeared to show an inclining trend again the financial year 2011 as the company was ab le to curtail and manage its cost of sales although the quantum of its sales