Cardingham’s profitability sub-ratios
Profitability ratio
The profit margin decreased to 7.4% in 2019. The profit margin was 10.30% and 8.19% in 2018 and 2017, respectively. This, therefore, shows that there was a steady decline in the profit margin over the years. That can be attributed to the continuous low gross profits over the years due to the increase in the cost of goods sold and decrease in the corresponding net revenues during those specific years as recorded in the income statement. Max plastic had a lower profit margin of 5.58% in 2019, compared to Cardingham Collectibles. The increase in the cost of goods sold by Cardingham Collectibles could have resulted because of an increase in the price of direct material and direct labor. The cost of raw materials might have also risen in the profit and loss account statement.
There was a 9.55% return on asset as compared to 6.42% from Max Plastic in 2019. Cardingham’s decreased return on investment percentage from 2018 shows that the company is experiencing reduced profits in comparison to the amount of money that it has invested in its assets. Return on equity percentages was 17.07%, 20.62%, and 18.06% in 2017,2018, and 2019 respectively, while that of Max plastics in 2019 was 23.28%. Based on the general decrease in Cardingham’s profitability sub-ratios, profit margin, and return on asset ratios, it shows that the company is struggling to generate profits as compared to its operating costs. Don't use plagiarised sources.Get your custom essay just from $11/page
Liquidity ratio
Cardingham’s current ratio decreased to 1.54 in 2019, as compared to 1.83 in 2018. Max plastic had a higher quick ratio in 2019 of 1.61. This shows that Cardingham Company is less able to meet its short term debt obligations. Quick ratios decreased to 0.45 in 2019 as compared to 0.49 in 2018, while Max Plastics had a higher quick ratio of 0.85. This shows that Max Plastics does not have trouble paying its short term debts as compared to Cardingham company. Based on the earlier noted decrease in profitability ratios, coupled with also the low liquidity ratio, we can conclude that the company might have difficulties in meeting its short term debts. As a result, they should sell their shares to raise capital that may be used to offset those debts.
Asset Utilization ratio
Receivables turnover of Cardingham, decreased from 12 in 2007 to 9.3 in 2019 while Max Plastic company was 12.12 in 2019, which is higher as compared to that of Cardingham. It’s average collection period also increased from 30 days to 39.24 days in 2019. Inventory turnover also decreased in 2019. However, Cardingham’s capital assets turnover rose to 2.50 as compared to 1.31 in 2017, while Max Plastic had a lower asset turnover ratio of 2.14. This, therefore, shows that there might have been an increase in total net sales in 2019, which is advantageous and also increased total assets in the balance sheet.
The increase in the asset turnover ratio suggests that the company can utilize its assets effectively, which may lead to the realization of profits. The company should consider looking for long term credit because they will be able to invest in assets such as buildings or machinery and realize more profits.
Debt Utilization Ratio
Debt to total assets of Cardingham declined from 54.06% in 2017 to 42.09% in 2019, while Max’s ratio in 2019 was 72.30%. This shows that Cardingham has a stronger financial structure as compared to Max’s company, whose structure is mainly funded by debt. It also shows that there are lesser assets in the balance sheet since debtors are assets and even lower total debt. Cardingham company, therefore, requires investment through the selling of shares to acquire more capital that is not in the form of debt. The increase in times interest earned ratio of Cardingham company shows that it can service its debt obligations over time and is performing reasonably well and less able to become bankrupt in the future.
Other items
Total operating expenses have increased in Cardingham Company from $804562, in 2017 to $1627216 in 2019. Max Plastics had a higher total operating expense in 2019, at $3740940. An increase in operating expenses has a direct effect on the operating profits that are to be realized. That, therefore, may lead to a decrease in the profit margin ratio.
In comparison to Max Plastics, the Cardingham company is better off since it has lesser total operating expenses. That, therefore, indicates proper financial management. The company should, therefore, acquire capital through shares to raise more capital that will be used to offset the operating expenses.
Total current liabilities also increased to $1387451, in 2019 from $565269, in 2017. Max Plastics had a higher total of current liabilities of $3748251 in 2019. This, therefore, shows that there is relatively good financial management in the Cardingham company. The company should, however, stop financing itself through loans because they attract interest expense, which is deducted in the profit and loss account that may lead to the recording of lower profits. Interest expense is also a liability and, therefore, is counted in the balance sheet. Reducing it will ensure a decrease in total liabilities, which will then increase the liability to assets ratio. The company will, therefore, be more solvent.