Common Size Analysis for SUM Company Accounting, Finance Paper

Finance Report
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Finance Report
Common Size Analysis for SUM Company
Common size analysis is an essential tool for showing the company’s financial position in the market. The results from the common size analysis for SUM Company indicate that the firm has been doing fairly well in terms of investment opportunities. Comparing total assets for the company for the three years, the company has improved in asset acquisition. In 2016 for instance, the firm’s total assets stood at 1.5 % before dropping to 1.5 % and they are currently at 1.8% as seen from table one in the appendix section. An increase in assets implies the stability of the firm and its ability to compete. The percentage change analysis shows no improvement in the company’s financial position in the market. A comparison of the 2017 percentage change to that of 2018 percentage change yields nil results for both years, signifying that the firm is neither losing nor gaining. This is specifically favorable for the firm as compared to it making negative returns from the market. This suggests that the company may require increasing its working capital if indeed it is to fetch good returns from the market. Nil percentage change is risky because it can shift to positive or negative any time depending on the probabilities of changes in the market.
Ratio Analysis
Ratio analysis is performed to find the company’s financial position in the market. Five financial ratios are performed for SUM Company and the results are tabulated in the appendix. The rations with their strengths and weaknesses are discussed below.
Financial leverage ratios
They are performed by comparing debt or equity to assets with the goal of determining the company’s true value in the business. This is the most appropriate way to determine the company’s financial position, especially because of taking into consideration the debts that the company has incurred. From the data in the ratio analysis table in the appendix, SUM has a debt ratio of 0.62. According to Rigs (2017), a leverage ratio of 0.5 or less is good for the company. The figure for SUM is 0.62, indicating that the company has a strong dependence on debts. The weakness of the findings from leverage ratios is that it ignores the propensity for growth. It also ignores other areas of the financial statement such as the net revenue from the firm. Sometimes a company may decide to incur debts because it is investing in constructive projects, but leverage ratios will capture this as a limitation.
Liquidity ratio
This is a measure of a company’s ability to pay its debts when it is expected to do that. The figure for SUM is 0.64 as of 2018. High liquidity ratios indicate that the company has enough money to pay debts if needed to do that. The figure from the analysis of SUM indicates that the company may struggle to pay its debts if it is required to do that. Liquidity ratios are the most appropriate methods of determining the company’s ability to meet the lender’s deadline. Their main weakness is, however, that they rely on the number of available assets without considering the value of those assets. Some assets may not fetch enough money to settle debts.
Profitability ratios
Profitability ratios are used to compare the profits that the company generates from sales. The higher the profits, the higher the stability of the firm and its ability to attract and retain investors. Sometimes this is a misleading approach because the company may be willing to sell at lower prices and make little profits and attract customers with an intention of penetrating the market.
SUM’S Market Value Based on Leverage Ratios and Capital Structure Policy
Table four in the appendix is a summary of SUM’s market valuation from the financial leverage rations. It is clear from the analysis in the table that the company’s market valuation has been dwindling for the past three years. The low values indicate that this firm’s capital structure policy is misleading it and is likely to lead the company into bankruptcy. Additionally, investors are likely to avoid a company with low market valuation because it cannot generate enough profits to pay off debts while at the same time selling its shares at a higher value. SUM Company for instance, is earning 0.12 per share that it trades at the market. This value is very small and does not guarantee or promise the success of the firm. Another point to consider is that SUM’s capital structure is trending towards financial leverage, which is likely to lead the company to potential bankruptcy. The goal of the company should be to minimize debts and increase the revenue from other sources instead of debts. If the company’s capital structure policy is failing it, SUM could consider avoiding more debts and focusing on attracting investors by increasing its market value.
SUM’s Dividend Payouts and Dividend Policy
SUM pays two types of dividends to its shareholders. The interim dividend policy is paid before the company makes final payment to its shareholders and is smaller of the two types of dividends that the company uses. From the analysis in the table in the appendix, SUM’s dividend policy. Different factors affect the company’s ability to pay dividends and these factors have to be taken into consideration before declaring interim dividends. There are cases where a company is supposed to analyze prospects of growth in the market before issuing and declaring dividends. Some of these factors may be beyond the company’s control, especially considering that the market is unpredictable. SUM company’s final dividend ratios range between 0.034 and 0.07. The interim dividend rations are slightly different from the final dividend.
Summary of SUM’s Market Performance, Overall Health and SWOT Analysis
SWOT analysis is used to determine the company’s strengths, weaknesses, opportunities, and threats in the market. SWOT analysis will be a handy tool for going to the market, especially considering the fact that the company has been in operation for a while. In this analysis, the focus is on internal factors such as strengths and weaknesses because the company can directly control them. External factors are the threats and opportunities because the firm can hardly control the, even though they can dictate the success or failure of the company.
Strengths
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