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Submitted by robingreening on June 16, 2007
Category: Business
Words: 1011 | Pages: 5
Views: 398
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Figures in Riordan's financial statements and the computations of its financial ratios suggest that the company is in a precarious financial state. While Riordan has some working capital and an acceptable current ratio, its quick ratio (which is a better indicator of a company's health) falls below acceptable standards. At 56%, its debt to equity ratio is excessive by industry standards and implies that the company heavily relies on debt to facilitate operations. While it generated a positive net profit in 2005, its profit margin and return on assets are lower than that of other businesses within its industry--this suggests that Riordan may have problems regarding profitability.
Financial analysis
Riordan does not have enough cash to pay off its current liabilities and long-term debt. This may mean that Riordan is having problems converting assets to cash, and may be danger of bankruptcy--comparing its cash to its debts shows that Riordan appears to be relying on long-term debt to survive. Riordan also has a very high inventory, which means that they are having difficulties selling products for profit. A huge chunk of its assets are also tied up to receivables--suggesting that the company may be having problems collecting payment.
On a positive note, its current ratio is close to the ideal, which signals that Riordan's management is efficient in managing its cash flows. However, Riordan's quick ratio (which is a better indicator of a company's financial health) comes out as very low compared to acceptable standards. Its debt to equity ratio is also very high, further affirming that it relies too much on debt to finance its operations. As such, lending institutions may be less willing to lend financial assistance to the company. In addition to this, while Riordan's sales, gross margin, operating profit, and net profit have increase from the previous fiscal year, its profit margin and return on assets have shown...
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