Financial analysis

Financial statement analysis

Introduction

It is a requirement for companies to prepare financial statements and reports. This does not end there, as organizations are required to analyze the financial statements to draw meaningful conclusions. Financial analysis is essential in determining the health and stability of a company (Geltner et al. 2013). It provides an intuitive understanding on how an organization conducts business. Various stakeholders have to base their decision on financial information. From time to time, the shareholders need to make a decision whether they will continue to own the business. Management who are entrusted with the responsibility of formulating strategic business plans have to rely heavily on financial statement analysis. Others parties who rely on financial statement analysis involves creditors and investors. The present paper will present an analysis of financial statements of Arctic Cat and Polaris Industries .inc. To achieve this both horizontal and vertical analysis will be evaluated. Further, different ratio and creditworthiness will be evaluated.

Arctic Cat

Arctic cat experienced a growth in sales revenue of 9 percent in 2014 and 4 percent in 2015 compared to 2013. Although the company managed to maintain a constant cost of sales in both years, there was an increase operating expenses by 25% in 2015, a fact that highly contributed to decline in the operating income. In 2014, the company performed better financially compared to 2015. This is reflected by sales revenue, gross profit, operating expenses and net income. In 2014, the gross profit accounted for 21 % of the sales compared to 2015 when it accounted only for 17percent. This is an indication that the company might have reduced its selling price. Further, the prices of stocks seem to have increased. Despite the sales going down, the total operating cost increased. Arctic Cat highly invested in marketing, research, and development a move that was geared towards improving sales.

In general, total assets declined in 2015 compared to 2014. One of the most notable declines in assets was on short-term investment which declined by 22 percent in 2014 and 99 percent in 2015 when compared to 2013. Reduction in business operations and an increase in prepayments resulted in the decline of cash in hand. While the total current assets decreased (in 2014 total current asset comprised 83 percent of the total assets compared to 78% in 2015), fixed asset increased by 22 percent and 48 percent in 2014 and 2015 respectively. This can be associated with the increase in the value of property, plant and equipment and intangible assets.

Total liabilities increased in 2014 by 19 percent and in the following year they increased only by 4 percent. Current liabilities increased in 2014 but in 2015, they went down, which can be explained by a decline in accounts payable and accruals. Total stockholders’ equity increased by 6 percent in 2014 and 3 percent in 2015. In 2015, it accounted 54 percent of the total assets while in 2015 it accounted for 57 percent. This implies that the firm highly relied on internal sources of funding in 2015 compared to 2014.

The equity multiplier of Arctic Cat reduced from 1.85 in 2014 to 1.76 in 2015. This indicates an improvement in financial leverage. The company profitability reduced in 2015 while the asset turnover improved. Improvement in asset turn over shows that there is an increase in capacity utilization (Schroeder,  Clark and Cathey, 2013). The stability of the company improved in 2015 compared with 2014, a factor, which is reflected by increase in the debt ratio. Further, the current ratio indicates that the ability of Arctic Cat to pay its short-term debt using the current asset has improved. Although the Altman’s Z-score decline from 4.68 in 2014 to 4.35 in 2015, the company cannot be considered to be risky for creditors.

Polaris Industries Inc

The company has observed an increasing trend in sales revenue over the last three years. In 2014, total sales increased by 19% and in 2015 by 25% compare to sales in 2013. Following an increase in the sales, operating expenses also increased. Polaris Industries Inc, heavily invested in research and development. In 2014, the research and development cost only accounted for 3% of total sales while in 2015 it accounted for 4% of total sales. There was also increase in net income. This indicates that the management was able to increase the amount of sale while maintaining cost at reasonable levels.

Polaris Industries Inc has expanded over the last 2 years. It assets both current and fixed have been increasing. In 2014, current assets increased by 27% while in 2015 they increased by 33% compared to 2013. This indicates that the company operations have increased over the 2 years. In 2014, fixed asset comprised 47 percent of total assets while in 2015 they consisted of 52 percent of total assets. This implies that Polaris Industries. Inc  purchased more assets in 2015.

Equity multiplier declined from 1.88 in 2014 to 1.64 in 2015, an indication that company financial leverage improved. Polaris Industries .inc managed to maintain its profit margin constant. Given that they was an increase in sales, profit should have increased. This implies that the costs increased with the same proportion as the sales. However, the ability of the company to generate sales from asset has declined. This is reflected by asset turnover ratio, which reduced from 2.16 in 2014 to 1.98 in 2015. There were some improvement in the current ratio, which indicates that the capacity of Polaris Industries .inc to meet short-term obligation with current asset went up. The company’s efficiency has not changed a factor that is reflected by constant operating ratio. The creditworthiness of the company declined in 2015 compared by 2014 but still the company can be able to settle its debts.

Conclusion

While the profitability of Polaris Industries.inc has improved over the past 2 years, the profitability of Arctic cat has declined over the same period. The management of Arctic cat needs to take the necessary measures to steer up the sales and at the same time regulate the expenses. The company has high potential, a thing that is reflected by its balance sheet. Considering the fact that the company creditworthiness is high, it can borrow funds from financial institutions to finance its operation and improve its profitability. However, the company needs to improve its efficiency and capacity utilization.

From the above it is true to conclude that the financial health of Polaris Industries. Inc is strong. This is indicated by its profitability. Over the two years, the company has expanded, a move, which has resulted in the growth of profit as well as the value of the asset. However, there is always room for improvement. The company management needs to work on efficiency to ensure a further increase in profit. The company creditworthiness is high thus; it can borrow more funds to finance its operation and expansion.

 

 

 

 

References

Geltner, D., Miller, N., Clayton, J., & Eichholtz, P. M. A. (2013). Commercial real estate

analysis and investments.

 

Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2013). Financial accounting theory and

analysis: text and cases. Wiley Global Education.

 

 

 

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