Business Decision Making - Envy Rides - Case Study Example

Business Decision Making Envy Rides Case Analysis of Income ment i. Gross Margin Looking at the income ment ofthis company, there has been a tremendous increase in the gross margin from 21.4% in 2007 to 22.1% in 2009. The higher the percentage of the gross margin, the more the company retains on sales per dollar to take care of its other costs and obligations. Envy Rides, therefore, retains more every year on sales to take care of its other costs. With this trend, when Envys gross margin is likely to increase even more during the next two years. The company is, therefore, best suited to go for the loans since its gross margin can easily take care of such obligations. The working capital loan will even bring more revenue to the company. Hence, it will even help increase the gross margin even higher. ii. Expenses The business has really been working well on its expenses by cutting down on most of the recurrent expenditure, apart from salaries, to ensure that the expenses reduce from 40.3% to 17.2% from 2007 to 2009 respectively. This is more than two times reduction in percentage expenses. It is, therefore, easy to make a projection of further reduction in expenses that might be realized in the next two years to be at less than 5%. With this tremendous reduction in expenditure, the business is, therefore, expected to have more revenue on the retained earnings section to be used to reinvest in the working capital. The business therefore has no reason to go for a loan for the working capital as it can be obtained from the retained earnings. However, the position of the business through its expenses support more loan to be obtained since it can be repaid easily given the level of the recurrent expenses in the business is also expected to reduce further for the next two years. iii. Net Income The net income has also experienced some increase from 2.6% to 4.9% from 2008 to 2009. The increase in the net income may also show that the business is using too little to finance its expenses, and it is increasing its volume of sales. Therefore, with an increase in the net income, there is a possibility of further increase in the next two years. Envy can, therefore, go for further loan to renovate and add working capital since such attempts will only increase the net income, and the company will be in a better position to repay the loans. Ratio Analysis i. Return to Equity Ratio This is a profitability ratio that gauges whether the far that a firm can generate profits from the investments of the shareholders in the company. The return on equity ratio here has increased from 28.6% to 45.5% from 2008 to 2009. This shows that, currently, from every dollar that the shareholders invest in the business; they can get $0.455 back as a net income. The higher the ratio, therefore, the more efficient the company is in generating net income. It is, therefore, clear that Envy is becoming more efficient year by year on generating the net income. It also shows that the management are very effective in using the equity to fund firm operations and grow the company. It is possible to predict a further increase in the return to equity ratio for the next two years. For this reason, the company can easily be allowed to take the loans because the investment, and the resulting net income growth in the company are very encouraging. ii. Current Ratio The current ratio is another ratio that the company can use to detect whether it is possible to take a loan. It shows the firms ability to meet its current obligations from its current assets. The higher the current ratio, the better for the company as it shows that the company can easily pay off its short-term debts using its current assets. Envy has a current ratio of 1.12% in 2009, which shows a reduction since 2007 since it was 1.16 and 1.39 in 2008 and 2007 respectively. First, the current ratio is above 1 in all cases. Hence, it is a sign that the firm is in a good position, always to meet its current obligations when they fall due. However, there is a reducing trend in the current ratio since 2007. This shows that the firms ability to repay its current debts is reducing every year. This means that the level of the current assets is reducing every year as the level of the current liabilities increase. This can cause a problem to the company when requesting for a loan, especially the short-term loan. However, the company can go ahead and request for a long-term loan as the current ratio shows that all the current liabilities can be met by the business even in a long-term basis. The industry ratio is 1.3, yet the firms ratio is running far much away from the industry ratio. It will, therefore, be very hard to convince investors to provide the business with a short-term loan for the company. A two-year projection from 2009 may show a further decline in this ratio. However, if it goes below one, the company will be considered as one with a lot of difficulties in meeting its current obligations. iii. Acid Test Ratio The acid test ratio shows the ability of a firm to settle its current liabilities using its current assets. Therefore, it shows how many current assets the firm will have to settle its current liabilities. It shows which firms are highly leveraged by having more current liabilities as compared to its current assets. Envy has an acid test ratio that has been reducing since 2007 from 0.22 to 0.09 in 2009. This shows that, the firms ability to settle its current liabilities using its current assets is increasing. Envy is, therefore, at a less risky situation as it only has a small acid test ratio to settle. Envy, therefore, will not have a hard time settling its debt in the future in case it goes for it. The investors or the financiers will also have more confidence in the company to provide them with the loan they require since its balance sheet demonstrates its ability to pay off its debts with ease. When a projection is made, it is quite clear that the acid test ratio will reduce even further in the coming two years. The firm will, therefore, have no difficulty to be approved of its loan.it can, therefore, go for a loan since it can easily pay its current liabilities using its current assets with a lot of ease. The smaller the acid test ratio, the more effective the firm is in settling its current liabilities. iv. Working Capital The Working capital of the company also shows a reducing trend since 2007 where it was $360,763 and reduced to $308,138 by 2009. It, therefore, tell us that the firm has been losing on its working capital with time. The firm is, therefore, justified to go for more loan to increase its working capital. Like right now, it requires a working capital loan of $450,000, this cannot be financed wholly by the working capital that the company has unless more is added. Envy is, therefore, justified to move on and get the working capital loan. v. Debt to Equity Ratio The debt to equity ratio shows the companys proportion if investment that is financed by the creditors and the investors. For the case of Envy, the ratio is increasing every year from 2.0:1 to 6.5:1 in 2007 and 2009 respectively. A higher ratio in this case indicates that more financing by creditors such as bank loans is used in the company than the shareholders investment financing. The assets of Envy are, therefore, funded 6.5:1 by the shareholders to creditors. This shows that the investors or the shareholders have more stake in the business than the creditors. The business is, therefore, not so much owned by the creditors at the moment than by the shareholders. The business is, therefore, considered as more financially stable, hence will be approved of its loans. The industry requires a debt to equity ratio of 3.8:1 which is surpassed by that of Envy by far. Therefore, Envy is better run than most of the companies in the industry. Conclusion In a nutshell, Envy should be approved of its loans since its income statement shows financial stability of the business. Most of its ratios are telling that the business is stable and can take care of its debts. Therefore, the financiers will have no reason not to approve of its loans. It would be the best decision for the company, therefore, to continue with its bid to lobby for more loans from the financiers since it is in a good position to repay them. Read More