Running head: FINANCIAL RATIO ANALYSIS 1

Written Assignment Week 1

Financial Ratio Analysis for Great Service Cleaning and Maintenance Company

BUS 5111 Financial Management

Term 4, 2018-2019

University of the People

Financial Ratio Analysis for Great Service Cleaning and Maintenance Company

Ratio Analysis

Ratio analysis is a quantitative method of determining and interpreting a company’s

financial status through a variety of ratios (Kenton, 2019). Investors, analysts, and creditors use a

variety of standard ratios to analyze liquidity, profitability, debt, and asset management of the

company, look at trends over a time, and compare companies within an industry or sector

(Kenton, 2019).

Great Service Cleaning and Maintenance Company

Given the balance sheet and income statement of Great Service Cleaning and

Maintenance Company for 2013 and 2014, the company’s gross profit margin, current ratio, and

debt ratio were analyzed.

Gross profit margin. This ratio shows how a company controls the cost of its inventory

and the manufacturing of its products and subsequently pass on the costs to its customers and is

calculated using the formula: Gross Profit / Net Sales (Revenue) (Early, n.d.).

1,337,600 2,196,900
2013 = 21.25% 2014 = 22.65%
6,295,400 9,700,000

The above computation shows that the company’s gross profit margin increased by

1.40% from 2013 to 2014. With an adequate gross profit margin, the company can pay for its

operating expenses. However, to be able to assess the company’s performance, other layers of

profitability must be determined such as operating profit and net income (Early, n.d).

Current Ratio. This ratio measures how many times over a company can cover its short-

term liabilities with its current assets (Wohlner, n.d.). The formula to determine the current ratio

is Current Assets / Current Liabilities (Wohlner, n.d.).

3,726,900 4,602,200
2013 = 1.21 2014 = 1.47
3,092,850 3,125,950

A current ratio of 1.0 or greater is an indication that the company is well-positioned to

cover its current or short-term liabilities (Wohlner, n.d.). This current ratio analysis shows that

the company is in a good position to cover its short-term liabilities, however, the nature of the

company’s current assets must be considered to determine how quickly these can be turned into

cash to meet the liabilities.

Debt ratio. This is the ratio of a company’s total debts to assets including both short-term

and long-term debts, used to determine the company’s leverage in which the higher the debt

ratio, the more the company is leveraged or at financial risk (Kenton & Hayes, 2019). The

formula for debt ratio is Total Debt / Total Assets (Kenton & Hayes, 2019).

3,667,900 3,770,300
2013 = 72.99% 2014 = 63.28%
5,025,400 5,957,800

This analysis shows that the company has a high debt ratio of 72.99% in 2013 with a

9.70% decrease in 2014. Such high debt ratio may imply financial risk, however, analysts must

take into consideration if the company is into a capital-intensive business which has a higher

debt ratio compared to other industries in general.

In addition to the above ratio analysis, the debt-to-equity and the quick ratio/acid-test

ratios were performed based on the data in the income statement and balance sheet of Great

Service Cleaning and Maintenance Company for 2013 and 2014 respectively.

Debt-to-equity (D/E) ratio. Another type of leverage ratio, the D/E ratio shows how

much of the company’s debt is used to finance the company in relation to the amount of equity

used and is calculated as Total Debt (Liabilities) / Shareholder’s Equity (Investopedia, n.d.).

3,667,900 3,770,300
2013 = 2.70% 2014 = 1.72%
1,357,500 2,187,500
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Similar to the debt ratio, Great Service’s D/E ratio appears to be at high risk in 2013 at

2.70% which slightly decreased by .98% in 2014. In the same manner, analysts must take into

consideration if the business is capital-intensive that has a higher debt ratio than other industries.

Quick ratio. Also known as the acid-test ratio, this shows how well the company can

meet its short-term debt without having to sell any of its inventory (Wohlner, n.d.). The formula

to get the quick ratio is (Total Current Assets – Inventory) / Current Liabilities (Wohlner, n.d.).

3,626,700 4,512,400
2013 = 1.17% 2014 = 1.44%
3,092,850 3,125,950

This quick ratio analysis shows that the Great Service Company has sufficient liquid

assets to cover its short-term obligations with 1.17% and 1.44% in 2013 and 2014 respectively.

However, compared to the current ratio, the quick ratio does not include the inventory due to the

uncertainty of time it could take to be liquidated.

Observations of Trends in the Financial Statements

The assessment of the financial statements displays an increasing trend in certain values.

In the income statement, the contract revenues and gross profit increased in 2014 by 54% and

64% respectively while the total expenses in the same year, including general and administrative

expenses, interest expenses, other expenses, and taxes increased by only 19.8%. On the other

hand, the balance sheet shows 23.5% and 4.39% increase in current and long-term assets

respectively, with only 2.79% increase in total liabilities from 2013 to 2014. This increasing

trend shows that the company has become more profitable and less leveraged in 2014 than in

2013.

The financial ratio analyses show that both the net income and the total assets increased

from 2013 to 2014 which can be attributed to the increased service contract revenues. The

evaluation likewise shows that the company did not purchase additional equipment, instead, a
FINANCIAL RATIO ANALYSIS 5

sale was done in 2014. Taking into consideration the type of business, cleaning machines and

equipment are essential. This may imply that the company does not own the necessary machines

and equipment used in its operations which could result in higher contract costs due to rental

expenses. Therefore, further analysis of the company’s contract costs, as well as its long-term

assets, is deemed relevant. Lastly, I would have to ask the management why the company is

paying high-interest, what the long-term accrued liabilities are, and why it increased in 2014.

Limitations with the Informational Material

The materials provided for this financial analysis is limited and would not be sufficient to

draw a conclusion about the company’s performance and future direction. One relevant material

missing is the Cash Flow Statement (CFS) wherein the information of how a company generates

cash to fund its operations can be found (Murphy, 2019). The CFS contains three sections that

report the cash flow for the various activities of the company: (1) Operating Activities; (2)

Investing Activities; and (3) Financing Activities (Murphy, 2019).

Business managers, investors, creditors, and analysts rely on ratio analysis as quantitative

tools to determine the financial status and growth rate of a company which helps both internal

and external stakeholders in decision-making. In the case of Great Service Cleaning and

Maintenance Company, it appears that the company is performing well in terms of sales but with

minimal reduction of its liabilities. In essence, these results are not sufficient to fully evaluate

and understand the financial status of the company. Therefore, a complete set of financial

statements is crucial to avoid inaccurate financial reporting which could result in financial loss

and risks of legal implications.

References

Early, J. (n.d.). Profitability indicator ratios: Profit margin analysis. Retrieved from

https://www.investopedia.com/university/ratios/profitability-indicator/ratio1.asp

Hayes, A. (n.d.). Ratio analysis: Using financial ratios. Retrieved from

https://www.investopedia.com/university/ratio-analysis/using-ratios.asp

Investopedia. (n.d.). Debt ratios: Debt-equity ratio. Retrieved from

https://www.investopedia.com/university/ratios/debt/ratio3.asp

Kenton, W. (2019, March 11). Ratio analysis. Retrieved from

https://www.investopedia.com/terms/r/ratioanalysis.asp

Kenton, W. & Hayes, A. (2019, April 2). Debt ratio. Retrieved from

https://www.investopedia.com/terms/d/debtratio.asp

Murphy, C. B. (2019, April 15). Financial statements definition. Retrieved from

https://www.investopedia.com/terms/f/financial-statements.asp

Wohlner, R. (n.d.). Liquidity measurement ratios: Current ratio. Retrieved from

https://www.investopedia.com/university/ratios/liquidity-measurement/ratio1.asp

Wohlner, R. (n.d.). Liquidity measurement ratios: Quick ratio. Retrieved from

https://www.investopedia.com/university/ratios/liquidity-measurement/ratio2.asp