Ration Class of Fastenal Company - Case Study Example

Introduction Fastenal Company is a company that is publicly traded in the stock market. It manufactures anddistributes building and construction materials and supplies. This is done through chained network of several stores owned by the company around the region. The company supply building materials and construction equipment that are of great use in markets such as sheet metal, electrical, plumbing and road contractors. These materials include nuts, screws and other fasteners such as hydraulics, power tools and cutting tools. The company also takes part in the manufacture of welding supplies, janitorial supplies, electrical supplies and safety supplies (Investor.fastenal.com). Ratio Class Financial ratio analysis is the calculation of harmonized relationship of figures that appear in the financial statements. These relationships are known as ratios and they are very useful in analyzing the financial performance and financial position of a business. The financial ratios enhance the comparison of different companies in the same industry since the financial statements alone cannot play this role due to the difference in size of businesses. Financial ratios are divided into several categories according to the roles they play: profitability ratios, management ratios, liquidity ratios and solvency ratios. Profitability ratios These ratios measure the ability of a firm to make profit to its owners. They indicate the financial performance of a firm. The main profitability ratios are net profit margin, operating profit margin and gross profit margin. The calculation of net profit margin is (net profit/ sales) * 100%. The calculation of operating profit margin is: (operating profit margin/sales) * 100%. The calculation of the gross profit margin is (gross profit margin/ sales) * 100% (Bragg 54). Management ratios These ratios indicate the level of efficiency in a business. The main management ratios are return on equity, return on assets and the inventory turnover. The calculation of return on equity is (net profit/ total equity) * 100%. The calculation of return in assets is (net profit / total assets * 100%). The calculation of inventory turnover is (inventory/ sales) * 100% (Bull 87). Liquidity ratios These ratios indicate the ability of a firm to finance its current debts using its current assets. The main liquidity ratios include; quick ratio, current ratio and the net working capital. The calculation of the current ratio is current assets/ current liabilities. The calculation of the quick ratio is (current assets - inventory) / current liabilities. The calculation of the net working capital is current assets – current liabilities. Solvency ratios These ratios measure the going concern or the viability of a firm and its ability to meet its long-term debts. The main solvency ratios are the debt to equity ratio and the debt to assets ratio. The calculation of the debt to equity ratio is total long-term debt/ total equity. The calculation of the debt to asset ratio is debt / assets (Finkler 102). Ratio presentation Balance Sheet Items 2013 2012 2011 Current Assets 1.41 B 1.29 B 1.24 B Non- Current Assets 670 M 530 M 440 M Inventory 765 M 792 M 769 M Total Assets 2.08 B 1.82 B 1.68 B Current Liabilities 239.83 M 204.17 M 187.82 M Non-Current Liabilities 63.26 M 51.3 M 38.15 M Total Liabilities 303.09 M 255.47 M 225.97 M Equity 1.77 B 1.56 B 1.46 B Liabilities and Equity 2.08B 1.82 B 1.68 B Income Statement Items 2013 2012 2011 Sales 3.33 B 3.13 B 2.77 B Cost of Goods 1.61 B 1.52 B 1.34 B Gross Income 1.72 B 1.61 B 1.43 B Operating Expenses 1.01 B 941.24 M 859.37 M EBIT 710 M 668.76 M 570.63 M Other Expenses 261.36 M 248 .22 M 212.7 M Net Income 448.64 M 420.54 M 357.93 M Financial Ratios 2013 2012 2011 EPS (Basic) 1.51 1.42 1.21 Current Ratio 5.879 6.318 6.602 Quick Ratio 2.61 2.816 3.163 Working Capital 1.1702 B 1.086 B 1.052 B Gross Margin 0.517 0.514 0.516 Net Profit Margin 0.315 0.314 0.129 R.O.A 0.216 0.231 0.213 D/E Ratio 0.171 0.164 0.155 R.O.E 0.253 0.269 0.245 Inventory Turnover Ratio 0.235 0.228 0.233 Working: Current Ratio = Current Assets / Current Liabilities 2013: 1.41 / 0.23983 = 5.879 2012: 1.29 / 0.20417 = 6.318 2011: 1.24 / 0.18782 = 6.602 Quick Ratio = Current Assets – Inventory / Current Liabilities 2013: 1.41 – 0.784 / 0.23983 = 2.61 2012: 1.29 – 0.715 / 0.20417 = 2.816 2011: 1.24 – 0.646 / 0.18782 = 3.163 Working capital =Current Assets – Current Liabilities 2013: 1.41- 0.2398 = 1.1702B 2012: 1.29 – 0.204 = 1.086B 2011: 1.24 – 0.188 = 1.052B Gross Profit Margin = Gross Profit / Sales 2013: 1.72 B / 3.33 B = 0.517 2012: 1.61B / 3.13B = 0.514 2011: 1.43B / 2.77B = 0.516 Net Profit Margin = Net Profit / Sales 2013: 448.64 / 3330 = 0.135 2012: 420.54 / 3130 = 0.134 2011: 357.93 / 2770 = 0.129 R.O.A = Net Income / Total Assets 2013: 448.64 /2080 = 0.216 2012: 420.54 / 1820 = 0.231 2011: 357.93 / 1680 = 0.213 Debt /Equity Ratio = Total Liabilities/ Equity 2013: 303.09 / 1770 = 0.171 2012: 255.47 / 1560 = 0.164 2011: 225.97 / 1460 = 0.155 R.O.E = Net Income / Equity 2013: 448.64 / 1770 = 0.253 2012: 420.54 / 1560 = 0.269 2011: 357.93 / 1460 = 0.245 Inventory Turnover = inventory / Sales 2013: 784 / 3330 = 0.235 2012: 715 / 3130 = 0.228 2011: 646 / 2770 = 0.233 Ratio interpretation Profitability ratios The net profit margin has shown an increase over three-year period. It was 0.129 in 2011, 0.314 in 2012, and 0.315 in 2013. This increase show that the company’s ability to make profit for its owners has improved. It is an indication that the company performance is also improving. The gross profit margin has shown a similar trend but with a little fall in the year 2012. It was 0.516 in 2011, 0.514 in 2012, and 0.517 in 2013. The maintenance of a high level in this margin is a positive indicator of the company’s performance. Liquidity Ratios The current ratio has decreased over the three-year period. It was 6.602 in 2011, 6.318 in 2012, and 5.879 in 2013. This decrease indicates that the company’s ability to pay off its current debts using its current assets has reduced. The positive factor is that the company’s current ratio figure is a high figure, which implies that despite the decrease the company still maintains a high liquidity profile. The quick ratio has also decreased over the three-year period. It was 3.163 in 2011, 2.816 in 2012, and 2.61 in 2013. Despite this fall, the high figure of the ratio is desirable. It implies that the company is able to pay off its current liabilities adequately using its current assets excluding its inventory. The working capital on the contrary has increased over the three-year period. It was 1.052 billion in 2011; 1.086 billion in 2012 and 1.1702 billion in 2013.This increase indicate that its ability to cover its current liabilities using its current assets has improved. It is a positive indicator to the financial position of the company showing that the liquidity position of the company has improved (Muro, 66). Management ratios The return on assets ratio has fluctuated over the three-year period. It was 0.213 in 2011, 0.231 in 2012, and eventually 0.216 in 2013. This fluctuation of the ratios shows that the management has not been efficient in the utilization of all the assets to generate adequate profits. The return on equity ratio has shown consistency despite little fluctuations over the three-year period. It was 0.245 in 2011, 0.269 in 2012, and 0.253 in 2013. Despite the sudden rise in the ratio in 2012, the management has been consistent in their utilization of the shareholders equity to generate profits. The inventory turnover ratio has increased over the past three years despite the fall in the year 2012. It was 0.233 in 2011, 0.228 in 2012, and 0.235 in 2013. This increase shows improvement of the management’s efficiency in converting inventory to sales (Ross et al., 92). Solvency ratios The debt to equity ratio of the company has increased over the three-year period. It was 0.155 in 2011, 0.164 in 2012, and 0.171 in 2013. This indicates that the company has increased its dependency on debt over equity to finance its operations. If this trend continues, it will discourage rational investors from investing in the company due to the high levels of risk associated with debt. Overall conclusion The financial analysis shows that the financial position of Fastenal Company is desirable despite some issues, which further research need to be done in them. The financial position of the company is quite admirable. The management needs to maintain their efficiency to continue attracting investors. Works Cited Bragg, Steven M. Business Ratios and Formulas. Hoboken, N.J.: Wiley, 2002. Print. Bull, Richard. Financial Ratios. Oxford: CIMA, 2008. Print. Finkler, Steven A. Financial Management For Public, Health, And Not-For-Profit Organizations. Boston: Pearson Education, 2013. Print. Investor.fastenal.com,. Fastenal Company - Annual Reports. N.p., 2015. Web. 21 Mar. 2015. Muro, Vincent. Handbook Of Financial Analysis For Corporate Managers. New York: AMACOM, 1998. Print. Ross, Stephen A, Randolph Westerfield, and Bradford D Jordan. Fundamentals Of Corporate Finance. Boston, Mass.: McGraw-Hill/Irwin, 2006. Print. Read More