Based on the financial research data, you now know the financial strength (or weakness)of your company.? Write a Paragraph of Executive Summary and 2 pages of Financial Analysis

Cash Assessment

In order to ensure the accuracy of data comparison, our group took the Education industry as the comparison standard and calculated the average value based on New Oriental, TAL Education Group and Gaotu Techedu Inc to ensure the objectivity of data comparison. According to the course requirements, financial analysis is divided into cash assessment and profitability assessment.

According to the data in the above table, the advantage of New Oriental has decreased, followed by TAL Education Group (TAL), which is also the reason for the competition in the industry. All three companies have their advantages, New Oriental has the highest Payable turnover, TAL has the highest Working capital as a percentage of annual revenue and Accounts receivable turnover, Gaotu Techedu Inc (GOTU) had the highest Inventory turnover.

Working capital as a percentage of annual revenue

Working capital refers to the funds that a company can use at any time in daily operation, which is the value of current assets minus current liabilities of the company. Working capital as a percentage of annual revenue ratio reflects how much capital a company is applying to its annual revenue to cover short-term expenses. Due to the particularity of the education industry, the ratio of working capital as a percentage of annual revenue is relatively high in the global industry, while the ratio of New Oriental is lower than the average ratio of the Chinese market, which is the lowest among the three companies. This means that the other two companies have more advantages in this factor. TAL and GOTU have more capital to support day-to-day operations relative to their annual revenues, helping both companies to use capital flexibly. Although these figures of New Oriental are lower than that of its two competitors, its figures in the past three years are relatively stable, indicating that New Oriental has a plan for short-term capital needs or is good at seeking other forms of financing to meet them.

Current ratio

Current ratio = current assets/current liabilities

The current ratio is the difference between current assets and current liabilities. This ratio is a measure of a business’s ability to meet its short-term liabilities at maturity.[footnoteRef:1] When the current ratio is greater than 1, it indicates that the company’s current assets have strong solvency, because its current assets exceed its short-term debt, and the opposite is poor. It can be concluded from the table that the current ratio of the three companies is greater than 1, but the data of New Oriental in 2023 is lower than that of TAL and GOTU. This illustrates that the three companies are better able to repay their debts, while New Oriental is slightly worse than the other two companies. Although New Oriental has not continued to grow in this ratio in the past three years, it is still a growing trend. TAL’s high current ratio is due to its low current liabilities and GOTU’s high current ratio is due to its high current assets. [1: Gallo, A. (2015, September 14). A Refresher on Current Ratio. https://hbr.org/2015/09/a-refresher-on-current-ratio]

Quick ratio

Quick ratio = available assets/current liabilities

The quick ratio is also one of the important ratios to measure the liquidity of a company. Quick ratio refers to the ratio of quick assets to current liabilities, which measures the ability of an enterprise to repay current liabilities in current assets.[footnoteRef:2] The relatively standard data of the quick ratio is 1, indicating that the short-term solvency of the enterprise is relatively reliable. On the whole, New Oriental’s quick ratio has performed well, all above 1, and the ratio has not exceeded 2 in two of the three years. This means that New Oriental’s short-term debt repayment risk is not high, and the funds occupied in quick assets are reasonable. Its quick ratio and current ratio have similar trends over three years. [2: BDC. (n.d.) Quick ratio calculator (acid test ratio). https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/financial-tools/cash-ratio]

Accounts Receivable Turnover

Accounts Receivables Turnover=Net Annual Credit Sales/Average Accounts Receivables

Accounts receivable turnover indicates how quickly a business collects its accounts receivable over a given period, indicating how often it receives them.[footnoteRef:3] For a company, the higher the accounts receivable turnover, the more conducive to the development of the company, indicating rapid collection of accounts. Although New Oriental’s ratio has declined in three years, it is still at the leading level in the industry. New Oriental effectively manages its accounts receivable, and customers are highly efficient in paying their accounts. Possibly due to the Chinese government’s new policies on education in 2021, New Oriental closed one of its major businesses, K12. As it develops its new sales business in 2022, New Oriental’s accounts receivable increases, leading to a decline in its accounts receivable turnover. [3: Beaver, S. (2022, June 9). Accounts Receivable Turnover Ratio: Definition, Formula & Examples. https://www.netsuite.com/portal/resource/articles/accounting/accounts-receivable-turnover-ratio.shtml]

Inventory turnover

Inventory Turnover Ratio = COGS / Average Inventory Value

Inventory turnover is the number of times an organization counts all its inventory turned over or sold in a set number of years. The efficiency of an organization’s inventory management when selling products is determined by the number of times, it sell all its inventory, with the higher the quantity the more efficient.[footnoteRef:4] Due to the particularity of the industry in which New Oriental operates, its cost of revenue is mainly composed of labor costs and commodity procurement costs for free brand products and live e-commerce and other services.[footnoteRef:5] The high inventory turnover indicates that the company is efficient in managing inventory, which helps to reduce inventory utilization. New Oriental’s inventory turnover in the past three years has been higher than the industry average, but it has declined significantly in 2023. The reason for the decline in this ratio is the increase in New Oriental’s inventory. Inventories in 2023 will be almost double those in 2022. [4: Leonard, K. & Main, K. (2023, May 12). How To Calculate Inventory Turnover Quickly And [Examples Included]. https://www.forbes.com/advisor/business/how-calculate-inventory-turnover/] [5: New Oriental Education & Technology Group Inc. (2023). 2023 Annual Report. https://investor.neworiental.org/static-files/e58a01ad-8c06-4d5f-951c-38f8e02fd116]

Payables turnover

Payables turnover = Total Cost of Sales/ Average Accounts Payable

Accounts payable turnover is a measure of the speed of an enterprise’s payment to creditors or suppliers and is a key indicator of the enterprise’s liquidity and cash flow management.[footnoteRef:6] The ratio is calculated from total cost of sales and average accounts payable. A company with higher accounts payable ratios takes more time to make payments. New Oriental’s accounts payable turnover ratio in 2023 was significantly reduced compared with the previous two years, indicating that suppliers gave New Oriental more time to pay and reduced the frequency of payment. This may be due to New Oriental’s increased credibility with creditors and suppliers. New Oriental's accounts payable turnover ratio is the highest of the three companies, which we believe is because New Oriental has more business than the other two companies and has more inventory. [6: Schwarz, L. (2023, July 18). Accounts Payable Turnover Ratio Defined: Formula & Examples. https://www.netsuite.com/portal/resource/articles/accounting/accounts-payable-turnover-ratio.shtml]

Long-term debt/Owners’ equity

Long-term debt to Owners’ equity ratio = Long-term debt/ Owners’ equity

The Long-term debt/Owners’ equity ratio compares a company’s total long-term debt to owners’ equity. A higher ratio means that the company takes on more debt, making them more vulnerable to financial risk, potentially increasing financial leverage.[footnoteRef:7] New Oriental’s ratio has declined in the last three years, as their long-term debt has dropped from $297.63million in 2021 to $14.65million in 2023. This indicates that the negative impact that New Oriental may receive in terms of financial risk is reduced, which is conducive to its development. The other two companies had no information on long-term debt. [7: Tomasetti, B. (2023, February 6). Long Term Debt to Equity Ratio. https://www.carboncollective.co/sustainable-investing/long-term-debt-to-equity-ratio]

Cash from operations

Cash Flow from Operations Ratio = Cash Flow from Operations / Current Liabilities

The positive cash flow generated by a company’s operating activities indicates that the company’s core business is actively developing and provides a measure of the company’s earnings potential.[footnoteRef:8] The cash flow from operations ratio is a measure of how effectively a company’s cash flows from operations meet its current liabilities. New Oriental’s ratio in 2023 is lower than that of its two competitors because of its reduced cash flow from operating activities. Although this is not an optimistic signal for New Oriental business and debt repayment, the average level of the industry is not high. [8: Seth, S. (2023, December 20). Cash Flow from Operating Activities (CFO) Defined, With Formulas. https://www.investopedia.com/terms/c/cash-flow-from-operating-activities.asp]

From the perspective of cash assessment, New Oriental has advantages in the industry. New Oriental’s short-term solvency is higher, and its long-term debt has decreased. According to the accounts receivable turnover ratio, accounts payable turnover ratio and inventory turnover ratio, New Oriental’s asset operation capacity still needs to be improved.

Profitability Assessment

Profitability ratios are a class of financial metrics used to assess a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity. They show how well a company utilizes its assets to produce profit and shareholder value. Profitability ratios can be used to compare a company’s performance with its peers, industry averages, or historical trends.

Profitability ratios assess a company's revenue, assets, and equity income.[footnoteRef:9] They demonstrate the company's efficiency, performance, and industry edge. ROE, ROA, and profit margins (gross, operating, and net) are popular profitability ratios. The table below displays New Oriental Education & Technology Group Inc. (EDU), TAL Education Group (TAL), and GSX Techedu Inc. (GOTU) fiscal year 2023 profitability ratios and education sector industry averages. [9: Kharatyan, D., Nunes, A., & Lopes, J. (2016). Financial ratios and indicators that determine return on equity.]

· ROE: Return on equity (ROE) is the ratio of net income to shareholders’ equity, expressed as a percentage. It shows how much profit a company generates for each dollar of equity invested by the shareholders. The formula for ROE is:

ROE = Net Income / Average Shareholders' Equity

· ROA: Return on assets (ROA) is the ratio of net income to total assets, expressed as a percentage. It shows how much profit a company generates for each dollar of assets it owns. The formula for ROA is:

ROA = Net Income / Average Total Assets

· Profit margins: Profit margins are the ratios of different types of profit to revenue, expressed as a percentage. They show how much of each dollar of sales a company keeps as profit after paying for various expenses. The formulas for profit margins are:

Gross Profit Margin: Gross Profit / Net Sales

Operating Income Margin: Operating Income / Net Sales

Income Before Tax Margin: Income Before Tax / Net Sales

Net Profit Margin: Net Income / Net Sales

· Asset turnover: Asset turnover is the ratio of revenue to total assets, expressed as a number. It shows how efficiently a company uses its assets to generate sales. The formula for asset turnover is:

Asset Turnover = Net Sales / Average Total Assets

· Total asset/owner’s equity: Total asset/owner’s equity, also known as the financial leverage ratio, indicates how much debt a company uses to finance its assets. The formula for total asset/owner’s equity is:

Total Asset = Total Assets / Shareholders' Equity

· EPS: Earnings per share (EPS) is a measure of how much profit a company makes per share of its stock. The formula for EPS is:

EPS = Net Income / Shares Outstanding

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