Sanderson Farm Financial Analysis

Sanderson Farms Financial Analysis

Sanderson Farms’ financial performance over the past 6 years has done quite well with the exception of a rough year in 2011. By using different measures for liquidity, operating effeicincy, profitability, capital structure, and leverage risk, I can analyze the company.

Liquidity

To measure Sanderson Farms’ ability to pay off its short-term debt using assets that can be easily liquidated, we can look at the current ratio and quick asset ratio. The current ratio measures a company’s current assets against its current liabilities. Over the past six years, Sanderson Farms has had a positive current ratio each year showing they have enough current assets that can cover their liabilities to pay off its short-term debt; however, the current ratio doesn’t want to be too high that the company is holding onto too much cash where they can be missing investment opportunities. The quick ratio differs from the current ratio by removing inventory, because it is more difficult to turn into cash. Over the past six years, Sanderson Farms has had a positive quick asset ratio.

Operating Efficiency

To observe operating efficiency we can look at the inventory turnover, account receivable turnover, and working capital turnover ratios over a 365 days per year basis. The inventory turnover ratio is the number of times you turn inventory over into sales during the year. Sanderson Farms has a high turnover ratio with an average of approximately 11.This could imply they have strong sales and a lower risk of having inventory that can no longer be sold; however, it could also imply they are ineffectively buying. The account receivable turnover ratio shows how efficiently the company uses its assets by the number of times trade receivable turnover during the year. Sanderson Farms has a high accounts receivable turnover ratio. This could be due to the fact the company usually extends credit to its customers on a short-term basis and is efficiently collecting is accounts receivables. The working capital turnover ratio measure how a company is utilizing its working capital to support a given number of sales. Sanderson Farms is efficiently using its short-term assets and liabilities to support sales.