Keurig: Net Profit Margin and Benefits and Risks of Forming a Strategic Alliance
The purpose of this assignment is to evaluate the financial condition and performance of the firm you and your CLC group members have selected for analysis.
Refer to Tables A-1 through A-5 in Appendix II of the text for the operational definitions of and formulas for numerous common financial ratios, including profitability, liquidity, leverage, activity, and shareholders' return. Using these formulas, complete at least one ratio from each of the five categories, though you may apply as many of the ratios for which you can find the required information in the firm's financial reports. On your calculations page, specify for which formulas you are solving.
In an assessment of approximately 750 words, address the following:
1. Determine which of the ratios provide the most key insights into the firm's current level of performance. How can you assess whether the results of your calculations are positive or negative? Explain which of the ratios give you reason to be concerned with the organization's current strategy and why.
2. The Organizational and Operational Plans assignment references the possible benefits and risks of forming a strategic alliance. What would be the risks of forming a strategic alliance in terms of the firm's profitability ratios? Which of those five ratios is most likely to reveal immediate information for analysis of the alliance's effectiveness?
3. Considering today's financial climate, how likely is it that the organization could acquire the capital necessary to support an aggressive value-enhancement strategy? From where would that capital originate? Compared to current interest rates, what do you believe is a realistic interest rate the firm might incur? Which of the liquidity ratios will be impacted by the influx of capital, if borrowed?
Submit your calculations with your written response.
The Firm we selected was Keurig
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Financial Analysis
The ratio that provides the most critical insights into the firm's current level of performance is the net profit margin. Osazefua (2020) asserts that "the net profit margin also reflects management's cost efficiency since it is maximized when unit costs are well managed; however, it is more directly related to periodic profitability than to efficiency" (p. 7). Therefore, Keurig's net profit margin will offer its income performance measure, which will help to assess its current financial success.
To assess whether the results of my calculations are positive or negative, I will compare the firm's ratios with those of the sector's general rule. Generally, a ratio that is more than 1.0 is positive, while one that is less than 1.0 is negative (Cho et al., 2019). For Keurig's results, the calculations are both positive and negative. For instance, the net profit margin at 16.92% (N1), the debt-to-assets ratio at 0.51:1 (N3), the dividend payout ratio at 0.45:1 (N5), and the current ratios at 0.47:1 (N2) are all negative. On the other hand, the inventory turnover ratio is positive at 14.19:1 (N4).
The ratios that make me concerned with Keurig’s current strategy are the current ratio of 0.47:1 (N2) and the net profit margin of 16.92% (N1). A small net profit shows that the corporation generates less revenue from its operations or might incur losses (Cho et al., 2019). On the other hand, a low current ratio means that Keurig might struggle to pay its current liabilities and arrears.
The risks of forming a strategic alliance in terms of Keurig’s profitability ratios comprise the performance risk, where it will have to share its small profits and take advantage of the other company’s performance. A net profit margin of 16.92% (N1) is small; hence the firm that will form a strategic alliance with Keurig and share profits will result in that company’s lower production. The lower output will lead to lesser profits and wages for the workers. There might also be employment instability as wages go down and laying off employees. In addition to decreasing earnings fluctuations when the firms share profits, it may also reduce earnings growth in the long run. Therefore, a corporation’s group incentive plan to share profits with Keurig may lead to some of its employees helping those of Keurig since the latter company’s workers may not exert enough effort. Nevertheless, sharing incomes helps reduce shirking in team-based production work areas, hence contributing to productivity growth.
The profitability ratios are most likely to reveal immediate information for analysis of the alliance's effectiveness. Investors and analysts use these ratios in assessing and measuring a corporation's capability to make profits while comparing them to operating expenses, sales, assets, and stockholders' equity. Osazefua (2020) asserts that many businesses' financial sustainability is deteriorating, so econom...