FINANCIAL ANALYSIS

Financial Analysis

[Name of the Author]



Financial Analysis

Question # 1

A.

Profitability Ratios

Formula

2009

2010

Gross Profit Margin

Gross Income/Sales

0.369969

0.338033

Net Profit Margin

Net Income/Sales

0.075091

0.193785

Return on Equity

Net income/Equity

0.036331

0.094901

Return on Assets

Net Income/Assets

0.02017

0.054897

Asset turn Over

Sales/Total Assets

0.268613

0.283288

Liquidity Ratios

Current Ratio

Current Asset/ Current Liabilities

0.466204

0.49689

Quick Ratio

Current Asset-Current Liabilities/Current Liabilities

-0.5338

-0.50311

Debt/Equity

Total debt/Total equity

0.801184

0.728719

Efficiency Ratio

Cash Turn Over

Sales/Cash

8.408569

10.05471

Inventory Turn Over

Cost of Goods Sold/Inventory

62.7233

67.98845

Fixed Asset Turn Over

Sales/Fixed assets

0.293671

0.311503

Investment Ratios

Return on Investment

Net profit before tax/share holders equity

0.0494

0.0955

Question # 1

B.

Equity Investor

The equity investor will be more concerned about the return on the equity and the return on the investment. As the firm's investment ratio and the return on the equity is increasing hence for the equity investor. The firms return on equity and the return on the investment ratio is more attractive to invest hence equity investor will more likely to invest in the firm.

Financial institution

The profitability ratios like the gross profit margin are decreasing, but the asset turnover is increasing which indicates that the firm is utilizing the asset effectively. The return on asset and the return on equity are also increasing. The firm's current ratio is increasing however the quick ratio is poor, while the debt to equity ratio is decreasing hence the financial institution will more likely to permit loan to the firm (Denis, 2010) as the debt to equity ratio is sufficient and firm has the ability to pay back as the firm's financial performance is getting stronger. Hence as financial lending institution the firm can be granted loan.

Question # 1

C.

Advantages and Disadvantages of Ratio Analysis

Planning and Forecasting

The financial ratio analysis helps business manager to make planning and decision for forecasting. The ratios for instance the profitability ratio indicates the usage of assets and investments in order to generate the profit. When these ratios are unfavorable the management decides to increase these ratios in future. These ratios help in planning and forecasting.

Industry and Historical Comparison

The financial ratios allow a company to compare the performance with other firms operating in the same industry. These ratios are more accurate as they allow making comparison in percentages. These financial ratios help an individual or an investor to understand the position of the company. If these ratios are in positive it shows that the performance of the company is better, and these ratios can also be compared using (Chou, 2009) financial data's of the past years. These ratios also help in determining whether the company is more profitable or at loss or these are incurring more loss debt, when these ratios are compared with previous financial performance of the company

Financial Statement Limitations

The limitation of the financial statement is the disadvantage of the financial ratio analysis for instance according to accounting principles the assets are recorded on their historical cost which can be different according to the market value and as result the financial ratios using the balance sheet are not appropriate and accurate. Therefore the different methods of depreciation cause the flaws to occur due to which the net income is affected. The financial ratios are important when these ratios are compared with the historical data or the ...