The company's income statement and balance sheet (Appendix A and B) help to show Riordan's financial outlook. Shareholders outside the company interpret the numbers on those forms by calculating financial ratios to determine the company's strengths and weaknesses.
According to Curators of the University of Missouri (2010), several important financial ratios include Liquidity
oCurrent Ratio = Current Assets/Current Liabilities.
oQuick Ratio = (Current Assets-Inventories)/Current Liabilities. Safety
oDebt to Equity = (Total Debt/Total Assets) x 100.
oEBIT (earnings before income taxes)/Interest = Earnings Before Interest and Taxes/Interest Charges. Profitability
oProfit Margin = (Net Income/Sales) x 100.
oReturn on Asset s= (Net Income/Total Assets) x 100.
oAccounts Receivable Turnover = Total Net Sales/Accounts Receivable. oAccounts Payable Turnover = COGS/Accounts Payable.
oInventory Turnover = COGS/Average Inventories.
Looking first at the ratios that examine the company's liquidity, Riordan's Current Ratio is 2.09. Riordan's Quick Ratio is 0.96. The industry standard for plastics manufacturers in 2007, according to The Brandow Company (2010), for Current Ratio is 1.65 and for the quick ratio is 0.88. Riordan is well within the normal range for its industry.
The safety ratios measure the risk of vulnerability or "the degree of protection provided for the business' debt" (Curators of the University of Missouri, 2010, para. 8.) For Riordan, its Debt to Equity ratio is 36.1%. Toolkit Media Group (2010) explains that this ratio should be no higher than 50% or a company may have problems making debt payments. Its EBIT/Interest (also known as Interest Coverage Ratio) is 21.2. Kennon warns against owning any stock in a company with a ratio lower than 1.5 and to look carefully at the company's "history and consistency of earnings" (2010, para 5.) The main way that a company like Riordan can measure its profitability is by using the Profit Margin ratio, which for Riordan is 7.8%. Because the Profit Margin ratio is very specific for individual industries, shareholders compare that ratio with an industry standard. For manufacturing companies like Riordan, the current industry standard is 3.7% (Thomas Reuters, 2010, Profit Margins.) The Return on Assets ratio for Riordan is 5.7%. According to Grecon (n.d.), compare this ratio against the company's past performance because different...