Accounting Snags' Stock Price Has Been Cut Essay

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Snags' stock price has been cut in half the past few years. Investors are concerned that almost every reliable measure of the company's financial health has declined in that period. The worst area is with profitability, as the company's margins have declined sharply at all levels. If current trends in profitability persist, Snags will lose money in FY2013. Along with the decline in profitability and therefore investment returns, other ratios have also suffered. The company's operating efficiency remains poor to mediocre, its liquidity has improved but only because of inventory and receivables sitting longer than usual, and the gearing ratio has increased as the company has borrowed to offset the decline in operating cash flow.

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This report will focus on the areas of concern with respect to the profitability, efficiency, liquidity and capital structure of Snags Ltd. Financial ratios will be used as the basis of this analysis. All of the ratios are attached. The first set of ratios will be the liquidity ratios.

The company's liquidity ratings have improved over the past three years, from a current ratio of 2.18 in 2010 to 4.62 in 2012. However, the company has no cash, and all of its current liabilities are in inventory and receivables.

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Escalation in receivables and inventories highlights that the company is having trouble collecting from its customers, and having trouble moving goods. Indeed, in this industry the current ratio in 2012 places it as a middle performer, and the quick ratio as a low performer, so the company cannot take much solace in having improved liquidity ratios.

With respect to long-term solvency, it is worth knowing that the gearing ratio for Snags is over 2, and has been higher in the past couple of years than it was in 2010. The company has steadily added to its debt burden, while the value of shareholder's equity has grown at a much slower rate. The gearing ratio was in the middle of the industry, but is creeping towards the upper level of the industry, something that is not a positive development.

Profitability is perhaps the biggest concern for investors. Over the past three years, all of the margins have declined steadily and significantly. The company used to have superior margins, but now the gross margin is average for the industry, and the net margin is below the industry average. This decline, combined with the increased gearing,….....

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