Ratio Analysis of Agilysis Software Research Paper

Pages: 5 (1474 words)  ·  Bibliography Sources: 4  ·  File: .docx  ·  Topic: Finance  ·  Written: April 11, 2019

Even in a situation like this, where the company is losing money, there is no way to determine whether unethical behavior is taking place. Indeed, the financial statements submitted to the SEC are unlikely to admit outright any sort of unethical behavior – that would only come out later, following an investigation.

Agilysis' Use of Fixed Costs and Debt to Influence EPS

Debt is a means by which a company can increase or decrease the earnings per share. Essentially, the shares are a measure of the equity that the company has – a proxy at least, as the book value of the equity is publicly stated and a more accurate means of determining this. By increasing the debt, the company can increase the asset value of the firm. If the company takes on debt and then uses that money to conduct share buybacks, it will reduce the number of shares outstanding. That technique is perfectly legal and ethical, and it can be used in order to increase the earnings per share. In this case, the company is not making money anyway, so such an effort would not bear fruit.

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Fixed costs are built into the operating profit, and also the earnings per share. The only way for fixed costs to influence operating profit is if they are not reported properly – for example, a cost accrued in one quarter that is deferred to another quarter. In most cases, deferring a fixed cost from one quarter to the next would increase the operating profit and EPS, but would also constitute a fraud. While it is certainly possible to commit fraud in this way, that is also a fairly easy fraud to detect. Usually, fraud of this nature is done on the earnings side.

Financial Strengths and Weaknesses of Agilysis

Financial ratios can shed some light onto the strengths and weaknesses of a business in a few ways. One is via trend analysis, where the trends in ratios can be used to determine whether the financial health, or lack thereof, is improving or worsening. For this company, the financial health is getting worse in general.

Research Paper on Ratio Analysis of Agilysis Software Assignment

The ratio analysis can also highlight relative areas of strength and weakness. For example, our company here has a health current ratio. Solvency is not an issue, even though it is not earning profits. This is important because even after multiple years of losing money, the company has retained solvency, and has very little long-term debt. Rather, its retained earnings are decreasing, and most of its liabilities are current liabilities. In this situation, one can determine that if the majority of its liabilities are current, but neither solvency nor liquidity are issues, then there is time for management to resolve the profitability problems before any sort of crisis occurs. The company, if the losses continue, can simply borrow in order to maintain operations, and there is nothing wrong with that as long as there is some sort of pathway to profitability within the time frame in which the company can expect to maintain its health. The issue here is more that profitability is decreasing, and the company does not seem to have a pathway to becoming profitable. It’s not a worry in the short-run, but one would certainly have to believe in the company’s ability to turn its situation in the market around.

Reflective Narrative for Agilysis

Completing this project was valuable in terms of being able to reflect on what financial statements can and cannot do. For example, they can be used to evaluate the financial health of the firm. There are still, however, things that have to be known about the company and its business. For example, if we knew that this company has by far the best software on the market, we might be able to have more faith in management’s ability to bring about profitability, and in that sense be more comfortable with the losses, knowing that there are no solvency or liquidity issues. It was also interesting to think about the ethics question. There is really no way for these statements to put us inside the company to see its day-to-day behavior. While financial statements are part of the fraud detection process, this is usually a much more complex, detailed process and the sort of superficial analysis that a few ratios comprises cannot tell us one way or… [END OF PREVIEW] . . . READ MORE

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