Company G’s Financial Ratios Analysis

Financial statements and ratios are very useful in determining a company’s financial position. This paper provides an interpret ion of Company G’s financial condition using the provided financial statements and pertinent industry data. A number of useful ratios have also been calculated for year 11 and are shown on the attached Microsoft Excel-based Statement Analysis Template.

Ratio calculation for Year 12

The ratios for Year 12 were not available because of missing data. However, these ratios are determined as follows:

  1. Current ratio = current assets/current liabilities
  2. Acid-test ratio = (cash + accounts receivable + short-term investments) / current liabilities
  3. Inventory turnover = sales / inventory (or cost of goods sold / current or average inventory)
  4. Accounts receivable turnover = net credit sales / average accounts receivable
  5. day’s sales in receivable = (total receivables / total credit sales) * days in period
  6. Total debt ratio = total debt / total assets
  7. Times interest earned ratio = (net income + interest) / interest.
  8. Rate of return on net assets = net income / total assets
  9. Rate of return on total assets = total income / total assets
  10. Rate of return on common stockholder’s equity = net income / shareholder’s equity
  11. Earning per share of common stock = (net income – dividends on preferred stock) / average outstanding shares
  12. Price earning ratio = market value per share / earning per share
  13. Book value per share of common stock = (total shareholders equity – preferred equity) / total outstanding shares

Horizontal analysis of the income statements

Horizontal Analysis
Change % Inc (Dec)
#N/A #N/A
#N/A #N/A
#N/A #N/A
2,349,000 9.10%
-45,000 -20.27%
153,000 6.61%
2,457,000 8.66%
#N/A #N/A
66,000 36.07%
18,000 4.69%
48,000 -23.88%
#N/A #N/A
633,000 12.53%
#N/A #N/A

Horizontal analysis of the balance sheets

Horizontal Analysis
Change % Inc (Dec)
#N/A #N/A
-126,000 -350.00%
-48,000 -1.82%
4,969,000 24.24%
295,000 42.88%
#N/A #N/A
1,359,000 10.58%
2,994,000 12.01%
1,551,000 16.48%
5,904,000 12.51%
1,875,000 22.77%
4,029,000 10.34%
#N/A #N/A
#N/A #N/A
213,000 11.40%
-57,000 -4.62%
453,000 17.30%
#N/A #N/A
162,000 5.31%
276,000 24.34%
438,000 10.47%
#N/A #N/A
0 0.00%
1,029,000 7.61%
#N/A #N/A
#N/A #N/A
#N/A #N/A
#N/A #N/A

Business memorandum to the CEO of Company G Memo

  • To: CEO of Company G
  • From: Financial Analyst
  • Date: 26 July 2011
  • Subject: Financial ratios Analysis

The financial ratios highlight the company’s position. Four ratios (inventory turnover, accounts receivable turnover, total debt ratio, and book value per share of common stock) highlight the company’s strength. An inventory turnover of 6.1 is a good sign or strength for the company. When products stay in a warehouse, they tend to depreciate. Accounts receivables turnover of 32.2 highlights some strength of the company. This ratio shows the company’s efficiency in utilizing its assets. The high ratio denotes the company’s efficiency is high. The debt ratio of 28.34% is an indication of strength for the company. Since it is less than one, it means that the company has more assets than its debts. This ratio can be used by investors to determine the company’s level of risk. The book value per share of common stock of $4.25 is a strength for the company because its shows a relatively higher level of safety of an individual share after debt payment.

The other ratios noted indicate some weaknesses or threat to the company. The current ratio indicates company G’s ability to pay back its short-term liabilities with its short term assets. At a current ratio of 1.86, the company’s ability to pay its obligations is low. This is a significant weakness of the company. An acid-test ratio 0.60 also shows a weakness of the company. This low ratio suggests that company G cannot pay its current liabilities. The day’s sales in receivable ratio of 11.1 indicates a weakness. This high ratio shows that the company not only sells it products on credits but it also takes relatively a longer period for it to collect its dues. The times interest earned ratio of 31.12 is a weakness or a bad sign for the company because a high ratio denotes that a company is using a lot of earning to pay debts instead of investing in meaningful projects. A rate of return on net assets of 5.43% is a weakness for the company. It is too low thereby showing that the company has poor profit performance. A rate of return on total assets of 12.30% is also low and highlights a weakness for the company. It means that the company profitability in relation to its total assets is low. The earning per share of common stock of 0.672 is also a bad sign or weakness for the company because a low ratio shows less profitability. This ratio shows the proportion of company G’s profit that is allocated to every outstanding common stock share.

Some ratios highlight threats to the company. The rate of return on common stockholder’s equity of 20.20% is a threat to the company. This low ratio means the company generates less profit with the shareholders’ investment. The price earning ratio of $5.21 is a threat to the company because a low ratio means investors would be expecting low earnings (Horngren, & Harrison, 2009), which would in turn away investors.

The company has a low financial position is relation to the industry. This status is indicated by the fact that the following ratios are lower than the industry’s corresponding average ratios: the current ratio, acid-test ratio, inventory turnover, accounts receivable turnover, the book value per share of common stock, rate of return on net assets, rate of return on total assets, earning per share of common stock, and price earning ratio. However, the rate of return on common stockholder’s equity is higher than the corresponding industry’s average ratio showing strength of the company in relation to the industry.

The day’s sales in receivable and debt ratio are lower than the respective industry’s average ratios meaning the company has a competitive edge. However, a higher times interest earned ratio means the company financial position is weaker in relation to the industry standards (Horngren, & Harrison, 2009).

Reference

Horngren, C. T., & Harrison, W. T. (2009). Accounting. (7th edn.). Upper Saddle River, NJ: Prentice Hall.