Accounting & finance Financial Ratio Anlysis Essay

Accounting & finance Financial Ratio Anlysis - Essay Example Prolong Limited’s gross profit margin decreased from 42.4% in 2009 to 37.5% in 2010. This can be due to the considerable increase in the cost of goods sold from $680,000 in 2009 to $750,000 in 2010. Prolong Limited’s net profit margin was 19.8 % in 2009 and decreased to 13.9 % in 2010. This was due to the increase in the operating expenses of the company. This rise in costs can be due to the rise in the inflation rate in the economy. Prolong Limited should take measures to control their costs of producing the goods. 60% of the current assets are tied up in stock due to which the liquidity position of the company is not very good. Prolong Ltd does not have ample cash to repay its creditors and due to this amount owed to the creditors have increased. Prolong Ltd should improve upon its liquidity position so that it can repay its debt on time. The overall liquidity of the company in 2010 has improved because of the bank loan taken by Prolong Ltd. But still, the creditors of Prolong Ltd are accumulating and it would be difficult for Prolong Ltd to repay its debt if the company does not generate ample cash through sales. Moreover, most of the cash of Prolong Ltd is tied up in non-current assets. Prolong Ltd can generate cash by selling off some of their non-current assets which will improve their liquidity position. Asset turnover indicates the sales that are generated from $1 investments in assets. Prolong’s Ltd asset turnover remained relatively stable in 2009 and 2010. Although the sales increased marginally by $20,000, the total assets increased by $99,000. The investment in the assets was not translated into the corresponding increase in sales revenue. Days inventory ratio of Prolong Ltd indicate that it took 79 days on average to sell the goods in inventory in 2009 and 93 days in 2010. The days inventory has increased in 2010 and this high days inventory figure is not very beneficial for the company. Days debtor ratio indicates