Please refer to the income statement and balance sheet for the Great Service Cleaning and Maintenance Company
- Perform a financial ratio analysis of the company using the following ratios: (1) Gross profit margin, (2) Current ratio, and (3) Debt ratio. From research independent from the textbook, find two other ratios to calculate. Define them and explain their purpose and how they add value to your analysis.
- Select significant lines from the financial statements and provide an observation of their trends (Is the account increasing or decreasing in value? What does this mean?)
- Draw some conclusions based on your observations. For instance, why do you think the assets of the company went up from 2013 to 2014? What implications does this have? What follow-up questions do you have to ask the company’s management?
- Support your observations with data and logic. Discuss what limitations exist with the informational material provided. What other material would be important to your trend analysis?
We have balance sheet and income statement of Great Service Cleaning and Maintenance Company and we need to find out
- Gross Profit Margin
- Current Ratio
- Debt Ratio
Gross Profit Margin
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 =
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 =
Current ratio = 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.
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 =
For the year 2014, total current asset was worth $ 4602200 and total current liability was worth
Current ratio for year 2014: 4602200/3125950 =
The debt ratio helps us understand how much of company’s assets are financed by debt.
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 =
In year 2014, total assets was $5957800 and total debt was $3770300
So. The debt ratio of 2014 was = 5957800 / 3770300 =
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 most probably 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 to grow.
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 hard 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 at least the company has generated more revenue in year 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..
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%).
The company’s total assets have gone up by almost 18.55%. Which is good, but 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 try 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 are they planning to rent in future instead of owning.
I would like to know the reason behind the increase in “Note receivable” and there is a increase in long term liability by 31.46%, we need to understand why the company has this increase, and where did they use this fund? 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%.