Ratios
When I first look at Schaffer Corporation’s ratios I can instantly see a drastic change (upturn) between the first two years (2016 & 2017), and the second two years (2018 & 2019). Before breaking the spreadsheet down to look at each individual ratio more carefully, this immediately makes me think that there was a business restructure or an extreme change in strategy or business conditions. Thus, will be my underlying question as I look into each ratio- what happened between 2017 and 2018? And, whilst big upturns such as the increase in the profitability ratios are obviously positive, do any of the ratios highlight weakness’s in Schaffer Corporation, since the profitability upturn.
Firstly, the net profit margin and the return on assets ratio both highlight steady growth between 2016 and 2017 and then more than triple themselves between 2017 and 2018, remaining steady into 2019. The profitability ratios highlight to us the company’s ability to generate profits in a period, in which a higher percentage is an indication that the company is preforming well. As Schaffer’s percentages are positive, it is evident that the company has been profitable for the past four years, drastically improving their ability to generate profits efficiently in the 2018 year.
The efficiency ratios have remained fairly constant over the past four years, with a slight drop in 2019. The efficiency ratios measure the efficiency of the company’s assets to generate sales revenue; comparing the dollar amount of sales to their total/current assets. It is a bit concerning that Schaffer’s efficiency ratios dropped in 2019 as it suggests the company was not utilising their assets as efficiently as they had been in previous years. Whilst the drop was not too significant, it could still be a sign of internal issues.
Schaffer’s current ratio and quick ratios significantly increased between 2017 and 2018. Liquidity ratios measure the company’s ability to pay off its short-term obligations upon falling due. The increase in 2018 proved that Schaffer increased their margin of safety to meet their current liabilities for the period. This was a reflection of Schaffer’s increased profits that year. Schaffer’s current ratio remained well above 1 each year from 2016 to 2019, signalling that the company did not look to be facing any real financial strife in meeting their debt obligations throughout the four year period. This is a reflection of positive financial health.
Moreover, the market ratios for Schaffer Corporation tell an interesting story. Earnings per share is resultant on the company’s profits – highlighting steady growth between 2016 and 2017 and then more than tripling between 2017 and 2018, then remaining steady into 2019. Dividends per share, however, have increased at a steady rate each year, with the biggest jump between 2018 and 2019. This indicates that Schaffer Corporation is financially stable and performing well in its current market condition. In addition, the fact that Schaffer’s earnings per share dropped slightly between 2018 and 2019 but dividends per share increased in this period signals that Schaffer is confident in their future profits. Schaffer’s price to earnings (P/E) ratio increased between 2016 and 2017 but then dropped significantly in 2018, remaining fairly constant into 2019. The P/E ratio tells us “what the market is willing to pay today for a stock based on its past or future earnings”. This suggests that Schaffer’s shares may have been overvalued in 2016 and 2017; however this higher P/E may have been a clear sign that investors were to expect higher earnings growth in the future.
Looking carefully into each of these ratios has helped me make sense of how Schaffer is performing overall. It has been interesting to uncover the flow on effects of Schaffer’s strong profit increase between 2017 and 2018.
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