FINANCIAL VIABILITY OF ABC CO.--Sumit AgrawalBBA 5th Semester Room No. 111#11777

Liquidity Ratio: Current Ratio: The current ratio of ABC Co. is 1.25. The standard current ratio for a given company is considered to be 2:1 which is more than that of ABC Co. So, ABC Co. Its ability to meet its short term obligations isnt very good. However, we cannot generalize this fact without knowing the kind of industry ABC Co. works in.Solvency Ratio: Capitalization Ratio (Debt to Capital Ratio): The debt to capital ratio of ABC Co. is 0.727 which means that, the company has financed 72.7% of its capital using debt and the rest using stockholders equity, the debt comprising of debentures and long term loans. This implies that the company is gaining advantage over taxation since the interest paid on debt is tax deductible, however the company is also losing money on interest expenses which could have been saved by using more amount of equity. In addition, each dollar of additional debt increases leverage of the company which increases the riskiness too. Leverage: The total debts to total asset ratio of the company is 0.769 which shows that the company is highly leveraged and therefore, at very high risk. This might prove very detrimental for the companys future, especially if the returns on its cost of capital arent very high.Coverage Ratios: Times Interest earned ratio: The times interest earned or interest coverage ratio of ABC Co. is 10. It is neither high nor low. A ratio of 10 shows that the company is still healthy and is easily able to meet its interest obligations without having to burrow from the market. It also shows the additional debt capacity the company has currently i.e. the company is in the position to burrow additional debt, to a certain limit, from the market and be able to meet its interest obligations easily.Profitability Ratio: Gross Profit Margin: The gross profit margin of ABC Co. is about 0.8 which is quite high and it shows that the company is making good profit on sales by either controlling cost of its inventory or by being able to sell its goods or services at higher prices to its customers.Return on Investment Ratios: Return on Assets: The ROA of company is about 0.315. Market rate of interest in Nepal is about 7% and the return is fairly high than that which means that the assets are very efficient in generating substantial returns. It shows that the company derives about Rs. 315 of return on each Rs. 1000 investment on assets which is a very high score. At this rate, the company should consider expanding its assets by putting in more investment.

Return on Equity: The ROE of the company is about 1.5 which shows that the investors are getting a profit of about 50% on the investments made which is a very good score. The company will benefit with a higher ROE if it reinvests its earnings into the companys operations without distributing much dividends to the shareholders which will help the company to achieve a higher growth rate. One reason that ABC Co. has a higher ROE is also that it is using higher amount of debt to finance its operations. So, reinvesting the earnings will help decrease the leverage and make it less prone to market risks.

The overall analysis of the organization shows that the company is performing well and has a good growth rate. As an analyst, Id like to advise the company to consider revising its debt to equity ratio. There is no single perfect debt to equity ratio and it is a highly debatable issue. Debt and Equity both have advantages and disadvantages. But a company should seek the sort of financing that will bear minimum costs and deliver maximum benefits to the company whilst minimizing the risk that the company is exposed to at the same time.Also, being in the stage of growth, the company should focus on retaining its earnings as much as possible without distributing as dividends to the shareholders. This retention of earnings will help the company minimize its expenses in interest, decrease the leverage and pose a multiplier effect on its growth.