As we look to evaluate the performance of Team Andrews against the competition there are three key areas that we will be evaluating for the board. Those areas include Return on Equity, Working Capital, and Return on Sales. Understanding these areas will give us the ability to present to the board not only our current state, but suggestions for improvement moving forward.
Return on Equity is a good way to measure the financial performance and is calculated by dividing net income by shareholders’ equity, typically is expressed as a percentage. A higher ROE is typically preferred as it indicates that the organization able to create more income from equity. Depending on the industry you can expect relatively high or low ROE’s, so it is important that when comparing to other organizations you are comparing to similar organizations within your industry, which we will be doing (Jagerson, 2018). Team Andrews ended Round 2 with an ROE of 10.1%, second worst in the industry, with Ferris leading the pack with an impressive 23.6%. In our industry, it is recommended that an organization carry an ROE of at least 15% to be considered healthy, a threshold met only by Ferris and Digby. A key to increasing our ROE is increasing total sales without disproportionally driving up assets and liabilities (shareholders’ equity). We have the second lowest ROE because we have the second lowest total sales and net profits in the industry, that is what needs corrected.
As an organization, it is important to understand your working capital situation as it is a measure of operational efficiency and its short term financial health. After round two team Andrews has a working capital dollar amount of $6.6 million, calculated by taking current assets minus current liabilities. A quick way to check if your working capital situation is a healthy one is to analyze the current ratio, as calculated by dividing current assets by current liabilities. A healthy ratio typically falls between 1.2 and 2.0, a ratio less than one indicates a negative working capital and potential liquidity issues, and a ratio above 2.0 may indicate that the organization has excess assets that are not being effectively utilized (Picard, 2018). Team Andrews has a healthy current ratio of 1.51, so there is no action required to correct at this time.
Finally, Return on Sales, calculated by dividing operating profit by net sales, is ratio used to evaluate a firms operational efficiency. This ratio indicates to the organization how much profit is being produced for every dollar of sales. For our industry a healthy ROS typically ranges from 5% to 15%, with team Andrews sitting at an ROS of 5.5%. This ratio is healthy but Andrews will be focusing on reducing expenses to increase this ratio. What is important to note are the ROS trends. Investors want to see an organization with increasing ROS ratios year over year, Andrews has accomplished that. After round one Andrews had an ROS ratio of -3.5%, meaning we have been able to improve efficiencies to the point where we are now running a relatively healthy organization (Investopedia, 2018).
Return of equity (ROE) is the measure of profitability of a company. This figure demonstrates how much profit a company has generated over the fiscal year. This figure corresponds with the shareholders’ total equity. Simplistically, the ROE is the amount of profit produced by each dollar of shareholders’ equity (Royer, 2015, 268). Hence, the goal of every corporation should be to ensure that this number is substantially high as it reflects the company’s profitability and keeps our shareholders engaged in our mission and objective, thereby sustaining their contribution. Team Andrews had a return of equity on -6.8%. There are a multitude of ways we may reverse these figures. Often times, it is not the product per se that the shareholders are interested in, rather it is a well-designed business that functions smoothly on all levels and is able to outdo competition in the global market(Royer,2015,270). Our ROE will increase if we have a greater cash flow from various facets. Many companies have (in addition to their product) stocks and bonds in addition to other commodities that ensure that money continues to flow into the company(Royer, 2015, 273). At present, we function in the market as a singular team on our own without addition assets/commodities to address our financial health. I do not think so much that it is our product that requires tweaking, but rather we should look into enhancing upon ways of generating cash flow. My suggestion would be for Team Andrews to expand upon their corporate horizons and network to achieve a higher ROE. By consistently building assets, we will obtain consistent wealth. The value of an attractive ROE is that it reflects the performance of the company.
Team Andrews had a working capital of $8,318. The working capital is a very important figure because it indicates the company’s level of liquidity, efficacy, and general financial health (Kim, Lim, & Taewoo, 2009, 152). In comparison to our company counterparts, one may deduce that our working capital is relatively high. This would indicate that we have an abundance of funds to meet our short-term goals and objectives. With this being notated, we conclude that we have managed a comparatively healthy working capital. In order to further increase our working capital, I would suggest we agree to settle any short-term debt at a diminished price. Another way to increase working capital would be to earn profits by way of networking and obtaining assets, as outlined in the previous paragraph.
With respects to Return of Sales (ROS), Team Andrews had a net income of ($3,883) and net sales of $110,505. Of our 4 remaining competitors, Team Andrews had the highest figure in total assets. This, to me, would suggest that we need to improve our asset turnover and increase profit margins. Our current ROS indicates that we spent too much money on production and while we produce optimum sensors, the costs of production is currently out of our bounds.
In conclusion, some financial concerns that I would like to address with my colleagues is our ability to produce innovative sensors versus the costs of production. Despite our latest report of a 2 star rating, I think we are off to a great start because we have the ability to produce high quality sensors, but just require adjustments in our ability to yield profit while simultaneously managing expenses (cash output). One way this may be achieved is through exercising our financial muscle by way of incorporating of additional assets and commodities into our corporate curriculum to meet out production demands.
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