Performing a Financial Statement Analysis Using Ratios
This section demonstrates the use of the common financial ratios in analyzing the 2010 FS, which is the latest financial report for our subject company, according to:
Current Ratio = Current Assets: $ 174,010 / Current Liabilities: $ 2,590 = $67:$1
Quick Asset Ratio = Quick Assets (Cash and Accounts Receivable): $163,200 / Current Liabilities: $2,590
Obviously, our subject company is quite liquid, since both ratios reveal that the entity has more than enough funds to meet every dollar of their current liabilities.
Gross Profit Margin Ratio = 2010 Gross Profit: $19,250 / Net Income: $5,460 = $3.52:$1
2009 Gross Profit = $12,490 / Net Income: $12,480 = $1:$1
2008 Gross Profit = $15,170 / Net Income: ($9,400) = $1.61: ($1)
The gross profit trend reveals that the profit ratio in 2008 indicated that the company only had $1.61 margin by which it could incur operating expenses for every dollar earned as income. This critical information was overlooked, because operations resulted in a net loss during the year. Nonetheless, 2009 and 2010 showed considerable improvements as the ratios increased by reducing the operating expenses.
2010 Net Income: $5,460 / Capital: $182,200 = $0.03:$1
There is still much to be desired as far as return on equity is concerned, inasmuch as the return on the owner's capital investment as of 2010 is only 3 cents to every dollar invested. Based on this, if would be best if the entity reinvested its resources by purchasing more viable goods that are affordable and widely patronized by their customers.