Data Analytics for Pharmacorp
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|✓ Wordcount: 1589 words||✓ Published: 6th Oct 2020|
Pharmacorp Company’s financial ratio analysis
When you go in to audit a company you want to start with a financial ratio analysis to get a good look at the company’s numbers. “Ratio analysis is critical for helping you understand financial statements, for identifying trends over time and for measuring the overall financial state of your business (Lohrey, 2019).” Financial ratios are grouped in four categories liquidity ratios, leverage ratios, efficiency ratios, and profitability ratios. In Table A.1 I have broken some of the important ratios down into those for categories which would include current ratio, debt to assets, debt to equity, turnover of receivables, turnover of payables, net profit margin, operating profit margin, and gross margin. The reason that we want to break these out into different areas is because we want a full picture of the company.
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Liquidity ratios will measure the company’s ability to repay short and long-term obligations. Under liquidity I chose to find the current ratio which will find the ability to pay off short-term liabilities with the company’s current assets. Leverage ratios will show a company’s debt levels. Who looking at these numbers you want to find out what the debt to asset ratio to determine how much the company’s assets are provided by debt. The other you want to know is the debt to equity ratio which “calculates the weight of total debt and financial liabilities against shareholders’ equity (What are).” Efficiency ratios measures how the company utilizes its assets and resources. A lot of this area is focused on the companies turn over ratios. The two ratios that I picked in this area were the turnover of receivables and the turnover of payables. The turnover of receivables will tell us how many times Pharmacorp can turn its receivables into cash over a selected period of time. The turnover of payables is the opposite of the receivables, it measures how many times a company pays its debt over a selected period of time. Last but certainly not least there is the profitability ratios. This area is were a lot of investors will be looking to see how profitable a company is before they decide to invest in them. Since this area is so important I have selected three ratios too look at. First is the net profit margin which will look into how efficient a company is at using its assets to bring in a profit. The second is the operating profit margin which will compare a company’s operating income to its net sales finding out its operating efficiency. The third is the gross margin ratio which will compare Pharmacorp’s gross profit to its net sales. This ratio will show people how much profit Pharmacorp is bringing in after it has paid off its cost of goods sold.
Among the ratios presented in table A.1, the senior editor also suggested that we include the Receivables as percentage of current assets, Receivables as percentage of total assets, and Allowance for uncollectible accounts. “Receivables as a percentage of current assets would reveal the size of receivables in current assets and the opportunity cost associated with it, higher the percentage and higher is the cost of carrying the receivables. It is therefore desired that a firm needs to carry the least percentage of receivables as possible without affecting the sales volume (Pushkar, 2010).” Receivables as percentage of total assets would be the same as receivables as percentage of current assets but just with the total assets amount. Lastly the Allowance for uncollectible accounts calculates the amount of accounts receivable that are expected to not be collectible. The amount in these uncollectible is money that is owed to the company but they are expecting that it will not be paid to them even though it is due. All of these ratios that comprise of the financial ratio analysis can be found on table A.1.
Evaluate the Data Reliability When Developing Expectations
When you are evaluating the data reliability you have to wonder if the data that you have been given is error free. Since we know that the 2014 data had been audited by an external audit team it is to be assumed that the info that was given for 2015 is error free. It is also verified in the fact that the 2014 and 2015 ratios are fairly similar to each other. Since we believe that the numbers are true we are able to use them to look into existing trends for Pharamcorp of the period of 1 year. However, just because this is true for the current situation it does not mean that the company sure rely on these trends for future years since trends can change at any given moment.
When looking into the ratios it is important to understand what you’re looking at in order to explain what you are seeing. According to the financial ratio analysis the most critical trend when you are looking at the 2014 and 2015 ratios is that of the profitability. Table A.1 shows that the gross margin has increased from 78.24% in 2014 to 80.92% in 2015, which shows that their business strategy is going well when it comes to their cost of goods sold. There has also been an increase in net profit margin and operating profit margin. With an increase in the profitability ratios that will be proven by the audit would prove to shareholders that Pharmacorp is able to improve their revenue cycle with a higher net revenue. That is if they have all their expenses accounted for in their numbers.
Another area that needs looking at is the fact that turnover of receivables has dropped from 4.952 in 2014 to 4.719 in 2015. The reason that this is important to look as is that it is telling us that we are collecting money that is owed to the company as a slower rate than last year. For this to be the case and still achieve a higher profitability is great, but it makes you wonder if it is sustainable in the long run of the company.
Industrial averages: Novartell and AstroZoro
When you look into a company’s financial ratios you want to also compare it with similar companies to find out if your company is aligning with like companies in the business. What Table A.2 is showing is the ratios for Novartell and AstroZoro as well as the industries average with all three companies. One of the biggest difference for the better when you look at Pharma Corp and the national averages in is the efficiency ratios. Pharamcorp is higher in turnover of receivable by .039 and turnover of payables by 5.10. What this means is that Pharmacorp collects and pays of debits that are owed to them and that they owe faster than the industry average. This would be great for them if they decided that they are needing to borrow money from another lender because the lender can see that they pay back their debt at a faster rate than the average. Another difference for the worst is in receivables as percentage of current assets and receivables as percentage of total assets.They are quite a bit lower than the industry average at 11.77% in receivables as a percentage of current assets and 3.03% for receivables as percentage of total assets.
Also a notable difference that is displayed on A.2 is that fact that the company’s profitability is higher in both net profit margin and gross margin despite being lower in operating profit margin.
Substantial Unanticipated Variances and qualitative materiality considerations
When it comes to substantial unanticipated variances it is any difference in the data that varies from the financial statements that is a result of a company’s miss-statement due to then being unaware that a variance existed. Pretty much this is an accident be the company but they were not doing in on purpose. When it comes to unanticipated variance will only be counted if they are considerable different then what has been reported. Most auditing firms have a set percentage of difference they will be ok with which is 10% for unknown sources and 5% for high risk variances.
- Lohrey, J. January 25, 2019. Importance of ratio analysis in financial planning. Chron. Retrieved From https://smallbusiness.chron.com/importance-ratio-analysis-financial-planning-80600.html
- Pushkar, Garg. November 17, 2010. Ratio of receivables to current asset. CAclubindia. Retrieved From https://www.caclubindia.com/experts/ratio-of-receivables-to-current-assets-521090.asp
- What are financial ratios? CFI. Retrieved on August 4, 2019 from https://corporatefinance institute.com/resources/knowledge/finance/financial-ratios/
Table A.1 Pharmacorp Company’s financial ratios
Table A.2 Calculated financial ratios for Novartell. AstroZoro, and the industry average
Table A.3 Modification to the 2015 financial ratios for different scenarios
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