Case Study of Great Service Cleaning and Maintenance Company

Abstract

This paper will provide a financial ratio analysis of the company using:  Gross profit margin, Current ratio, and Debt ratio, Quick ratio and Interest Coverage ratio. We will look into the significant line items in ‘Balance sheet’ and ‘Income statement’ and we will try to analyze the numbers and trends too.

 

Keywords: gross profit margin, current ratio, debt ratio

 

 

 

 

 

 

 

 

 

 

 

 

We have balance sheet and income statement of Great Service Cleaning and Maintenance Company and we need to find out

  1. Gross Profit Margin
  2. Current Ratio
  3. Debt Ratio

And we will look into the “Quick Ratio” and “Interest Coverage Ratio” too.

Gross Profit Margin

Gross profit margin gives us idea about the money company made from the revenue after covering its cost of goods sold (Investopedia, n.d.).  We have data for year 2013 and 2014, so let us first find out the ‘Gross Profit Margin’ for the year 2013 –

Gross profit margin = gross margin / net sales

In the year 2013 the Company made profit of = $1337600 and the Service contract Revenues was $6295400

Hence the gross profit margin for year 2013 = 6295400 / 1337600 = 4.71 or 47.1%

In the year 2014, the ‘Gross Profit’ was $2196900 and Service Contract Revenues was $9700000

Hench the Gross profit margin for the year 2014 was = 9700000 / 2196900 =4.42 or 44.2%

 

Current Ratio

Current ratio is expressed by = Current Assets / Current Liabilities

Current assets are most liquid assets, such as cash or cash equivalents, payment receivables or inventories. Any asset that can be converted to cash quickly is current asset (Investopedia, n.d.).

Current liabilities are payments to vendors and creditors or any such liabilities, those have to be paid back within a year.

From the Balance sheet we get for the year 2013, the company had current asset worth $ 3726900. And current liability was $ 3092850

Hence, current ratio for the year 2013:  3726900 / 3092850 = 1.2

For the year 2014, total current asset was worth $ 4602200 and total current liability was worth

$3125950

Current ratio for year 2014: 4602200/3125950 = 1.47

Debt Ratio

The debt ratio helps us understand how much of company’s assets are financed by debt (Investopedia, n.d.).

In the year 2013, the company’s total debt was = $5025400 and total assets was $3667900

So for year 2013, the debt ratio was = 5025400 / 3667900 = 1.37 or 13.7%

In year 2014, total assets was $5957800 and total debt was $3770300

So. The debt ratio of 2014 was = 5957800 / 3770300 = 1.58 or 15.8%

 

Quick Ratio:

Quick ratio is another way or most prominent way to find out if the company has enough liquid assets excluding inventory to meet its short term obligation (Investopedia, n.d.).

Quick Ratio = (Current Assets – Inventory) / Current Liability

The quick ratio for 2013 was: (3726900 – 100200) / 3092850 = 1.17 or 11.7%

The quick ratio for the year 2014 was: (4602200 – 89800)/ 3125950 = 1.44 or 14.4%

Interest Coverage Ratio:

This is used to determine how easily company can pay the interest on the debts it has (Investopedia, n.d.).

Interest coverage ratio = Earnings before interest and taxes / Interest expenses

Interest Coverage ratio for 2013: (581600+7700) / 70800 = 8.32

Interest Coverage ratio for 2014: (1300900+59900) / 69500 = 19.58

 

 

 

 

Significant line items from Balance Sheet –

Cash reserve has increase by 105% year on year. Which is good, especially when inventory has gone down by 10% that means, the sales are going up. And total current assets have gone up by 23% while inventory has gone down, that means, company is selling their service well.

Total assets have gone up by 18% but long term liability has gone up by 12%.The business is investing, but the increase is mostly concentrated in long term notes.

The retained earnings have gone up too and so did stockholders equity by 61%. The company is profitable and had good cash flow.

Total liability is up by 2.79%, that is not very significant, but it means, the company is not trying to pay down the debts.

From Income Statement the significant lines are –

The Revenue has increased by 54%, which is okay, not that great, but the gross profit margin has gone down from 2013 to 2014.

Gross profit has also increased in 2014 by 64%.  Net income has a good increase by 437%. One major chunk is coming from their equipment sell.

 

 

 

Conclusion –

The increase in cash (by 105.26%) and drop in inventory (10%) shows us, the sale is great, and we can see the same in revenue increase and gross profit increase (by 64%). We can see the Gross profit margin changing from 47.1% to 44.2%.

The company’s total assets have gone up by almost 18.55%. Which is good, cash has doubled, which is great. Although the company has sold some of its equipment, hence we see a drop is long term asset in equipment by 4.2%, but it has a significant increase in note receivables by 35.59%.  May be the company is trying to get rid of its old equipment that it does not use anymore, and trying raise cash selling  those. The company sold equipment in 2013 and 2014, we should find out if they have the equipment they would need or if they are planning to rent in future instead of owning.

I would like to know the reason behind the increase in long term asset -“Note receivable” while there is an increase in long term liability by 31.46%, we need to understand why the company had this increase, and why dint they pay down some debts? Especially when the Debt Ratio has increased from – 13.7% to 15.8%.  The retained earnings is up, the cash holding is up, but why they did not pay off some off their long term debts? And they are selling their equipment and investing in long term notes, are they making more in interest than what they are paying for the liabilities they have?

The company is doing well in terms of sales, but it could do better in paying off debts, and reducing costs, as we can see service contract costs have increased by 51.33%. Their Gross profit margin is dropping, which needs attention too, how can they reduce cost, options should be explored.

References

Retrieved on 4/17/2018. Retrieved from https://www.investopedia.com/terms/d/debtratio.asp

Retrieved on 4/17/2018. Retrieved from https://www.investopedia.com/terms/g/gross_profit_margin.asp

Retrieved on 4/17/2018. Retrieved from https://www.investopedia.com/terms/q/quickratio.asp

Retrieved on 4/17/2018. Retrieved from https://www.investopedia.com/terms/i/interestcoverageratio.asp

Retrieved on 4/17/2018. Retrieved from https://www.investopedia.com/terms/g/gross_profit_margin.asp

 

 

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