Financial health of HKM Essay Example | Topics and Well Written Essays - 1000 words

Financial health of HKM - Essay Example We see that HKM is doing a profitable business and the profits can sustain growth and expansion. The balance sheet allows a comparison of the assets the company owns and the liabilities. HKM has total assets amounting to 14278. Comparing this with the liabilities it reveals that HKM is not overburdened in any way by debts. Some ratios can help here. Liquidity is defined as a business' ability to meet its financial obligations2. It shows whether it is able to pay its short term bills (liquidity) and also projects whether its going to be able to service its long term debts when they become due (solvency). Two of the applicable ratios to calculate for HKM are: Going by the above analysis, HKM is doing rather well for a two-year old company. The company has recorded an impressive net profit, it is very liquid and the asset turnover ratio confirms that the company is very efficiently utilizing its assets. For more on ratio analysis see Lynch foulks (2001). The next tool of determining the condition of a business is the break-even analysis. According to some authors it is the volume of unit sales that must be made to at least recover the cost of sales3. For HKM Break-even is calculated as below Break-even analysis helps the management of a business to know the volume of sales that is needed to start making a profit4. ... Current ratio. It is a measure of a company's stability and efficiency. It is calculated as Current assets/current liabilities. = 3278: 1 372 = 8.81: 1 This is saying that HKM is able to pay its short-term obligations 8 times over and that's good news. Net working capital ratio. Net working capital is Current assets - current liabilities Net working capital ratio = Net working capital Total assets = 2966 = 0.21 14278 Return on assets. This ratio tells you the asset intensity of a company and is calculated as; Net income/Total assets = 17966:1 14278 = 1.258:1 1. Activity analysis ratio: Assets turnover ratio. Determines the total sales for every asset. The ratio tells you how efficiently a company utilizes its assets. = Sales Total assets = 87824:1 14278 = 6.15:1 Going by the above analysis, HKM is doing rather well for a two-year old company. The company has recorded an impressive net profit, it is very liquid and the asset turnover ratio confirms that the company is very efficiently utilizing its assets. For more on ratio analysis see Lynch foulks (2001). Chapter 2. Break-Even Analysis The next tool of determining the condition of a business is the break-even analysis. According to some authors it is the volume of unit sales that must be made to at least recover the cost of sales3. For HKM Break-even is calculated as below Contribution per item = 87824-56676-3954.6 500 = 54.39 Break-even point = 9227.4 169.66 54.39 Margin of safety = 500-170 * 100 500 = 66% 2.1 Benefits of the break-even analysis. Break-even analysis helps the management of a business to know the volume of sales that is needed to start making a