Financial Analysis: Evaluating the Financial Position of a Company

This document provides an overview of financial analysis and its importance in evaluating the financial position of a company. It discusses various financial ratios such as profitability ratio, liquidity ratio, and solvency ratio. The document also highlights the need for improving financial performance and suggests ways to do so.

Financial analysis

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Contents
Introduction...........................................................................................................................................2
Ratio Analysis.......................................................................................................................................2
Cash Flow Ratio....................................................................................................................................5
Conclusion.............................................................................................................................................6
References.............................................................................................................................................7

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Introduction
Financial accounting is a specialised branch of accounting that keeps all records of financial
transaction of the company. The transactions of the company are recorded, summarised, and
presented in the financial report or in financial statements such as income statements, and
balance sheet (Robinson, Henry, Pirie, and Broihahn, 2015). It is requires to maintain the
financial statements in order to reduce the issues and challenges which is face by the
company. Recording the financial statements helps to evaluate the financial position of the
company by evaluating the financial ratios (Macve, 2015). In this report, the financial ratio of
the company is evaluated in order to analyse its position in the market.
Ratio Analysis
Financial Ratio Analysis
2017 2018
Profitability Ratio
Profit Margin Net Profit 8500 4000
Net Sales
1,05,000
0.08
1,40,00
0 0.03
Liquidity Ratio
Current Ratio Current assets 56000 18,000
Current liabilities 19,000 2.95 18,500 0.97
Quick Ratio Quick assets 28000 -32000
Current liabilities 19,000 1.47 18,500 -1.73

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Solvency Ratio
Equity Ratio Total Equity 120000 108000
Total Assets 139000 0.86 149500 0.72
Return on proprietor’s capital
Net income-
dividend
8500 4000
Total debt and
equity 139000 0.06 149500 0.03
Inventory turnover ratio
Fixed asset turnover Net sales 105000 140000
Average inventory 29750 3.53 45750 3.06
Cash Flow Ratio
Cash flow from operating
profit Operating profit 117000
Net sales 4000 29.25
Profitability ratio is a financial ratio which states the capability of the company in terms of
paying debts. In the profitability ratio, the profit margin ratio has been evaluated in order to
analyse the profit of the company (CFI, 2018a). The ratio of the company is decreases from
the year 2017 to 2018. The profit margin ratio of the company is 0.08 in the year 2017 and it
decreases to 0.03 in the year 2018. It has been seen that the net sales of the company is
increases from 105000 to 140000 but the net profit of the company is decreases from 8500 to
4000. The amount reflects that the company will suffer with the loss in the near future. The
reason behind it that the amount of expenses is increases while producing the product. In the

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year 2017, the cost of sales is 65000 which are increases by 99500. The cost of sale is an
increase due to which the company amount of profit is reduces.
Liquidity ratio is the financial ratio that helps to evaluate the current asset of the company
that will be sufficient in order to meet the obligations. The current and quick ratio has been
evaluated in order to meet the obligations of the company (AccountingTools , 2018a). The
Current ratio of the organisation is 2.95 in the year 2017 and in the year 2018 it is 0.97. It
reflects that the capacity and ability of the company to pay its obligations are reduces. The
current asset of the company is decreases from the year 2017 to 2018 with the amount of
56000 to 18000. The decreasing current asset reflects that the asset of the company cannot
pay the obligations (Mohr, 2017). It is observed that the company pay its liabilities due to
which the amount of cash in hand is reflected negative. The liquidity ratio of the company
states that the organisation is not stable in terms of enough assets.
Solvency ratio helps to measure the ability of an organisation in order to meet its all liabilities
long term liabilities and such as short term (Peavler, 2018). The equity ratio of the company
has been evaluated in order to analyse the ability and capacity to pay its long term and short
term obligations. As per the evaluation of financial ratio, it has been seen that the total equity
of the company is reduces with the ratio of 0.86 to 0.72. In the year 2017, it has been seen
that the total capital of the company is 120000 in the year 2017 and it decreases in the year
2018 as it is 108000. The reason behind of decreasing the equity is that the reducing the cash
as it pays its liabilities and also sell the product in credit amount. The trade receivable amount
of the company is increases from the previous year as it offers the services on credit due to
which the amount of total asset is increases. The cash in hand is decreases due to which the
company is not able to issue the share. The equity ratio and return on proprietor’s capital

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indicates that the company will suffer with the loss in the future due to high liabilities
(AccountingTools , 2018b).
As per the above discussion, it has been seen that the company is not stable in its financial
terms as its liabilities are increases and the asset amount is decreases. It is observed that the
organisation has to be improved its services and approaches to enhance its financial position
in the market. It is observed that the company is not able to pay its all obligations such as
long term and short term due to which it is difficult for it to invest or buy the new assets to
expand the business or for survival. The main concern is that the company sell its product in
credit to its consumers in order to attract them towards its services. But it has been evaluated
that the company will face the challenge as the amount of cash is reduces in the year 2018 as
compare to 2017. The negative amount of cash states that the company is not able to issues
the share due to which the capital is reduces. The other concern is that the net profit of the
company is decreases from the year 2017 to 2018. It is observed that the cost of goods sold of
the company is increases due to which the amount of net profit is decreases. The company
has to reduce its cost of goods sold in order to survive in the market for long time. It is
observed that the company has to reduce the expenses and sale the product in cash so that the
financial performance will improve otherwise the company will suffer with the heavy loss in
the future.
Cash Flow Ratio
It is observed that there are many cash flow ratios that help the organisation to evaluate the
financial performance and the operating profit. Operating Cash Flow Ratio, Cash Flow
Margin Ratio, Price/Cash Flow Ratio and Cash Flow from Operations/Average Total
Liabilities are the cash flow ratio’s that helps to evaluate the operating profit of the company.
As the main concern of the company is its operation expenses and profit due to which it

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suffers with the heavy losses in future. It is recommended that the company has to evaluate
the operating cash flow ratio, cash flow margin ratio and cash flow from operations ratio as it
helps to evaluate the operation performance and profit (Wall Street Mojo, 2018). Although,
all the cash flow ratio of the company can easily evaluated and they all are beneficial for the
organisation to measure the financial performance or position and stock price. The company
can improve its performance by evaluating its operating profit and performance. As per the
evaluation of cash flow ratio, it is observed that the company have effective operating ratio.
The ratio states that the company has to reduce its operating expenses and reduces the trade
receivable amount so that they can easily operate in the market (CFI, 2018b).
Conclusion
As per the above discussion, it is concluded that the company is not stable in the financial
terms. According the financial ratio, it is observed that the company financial performance is
reduces year by year. The main area of concern is increasing expenses and offering the
products and services to consumers on credit due to which the amount of cash in hand is
reduces. It has to improve its financial performance by evaluating the financial position such
as it has to reduces its expenses and adopt the policy of collecting the amount of credit in few
days.

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References
AccountingTools . (2018a) Liquidity ratios. [online] Available from:
https://www.accountingtools.com/articles/2017/5/13/liquidity-ratios [Accessed 25/05/19].
AccountingTools . (2018b) Solvency ratio. [online] Available from:
https://www.accountingtools.com/articles/solvency-ratio-definition-and-usage.html
[Accessed 25/05/19].
CFI. (2018a) What are Profitability Ratios?. [online] Available from:
https://corporatefinanceinstitute.com/resources/knowledge/finance/profitability-ratios/
[Accessed 25/05/19].
CFI. (2018b) Operating Cash Flow Ratio. [online] Available from:
https://corporatefinanceinstitute.com/resources/knowledge/finance/operating-cash-flow-ratio/
[Accessed 25/05/19].
Macve, R. (2015) A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
Mohr, A. (2017) When Can a Decrease in an Asset Account Occur?. [online] Available from:
https://bizfluent.com/info-8519809-can-decrease-asset-account-occur.html [Accessed
25/05/19].
Peavler, R. (2018) Calculate the Solvency, Liquidity, and Viability of your Firm. [online]
Available from: https://www.thebalancesmb.com/cash-flow-ratios-for-analysis-393116
[Accessed 25/05/19].
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A. (2015) International financial
statement analysis. John Wiley & Sons.

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Wall Street Mojo. (2018) Cash flow from Operations | Formula, Calculations & Examples.
[online] Available from: https://www.wallstreetmojo.com/cash-flow-from-operations/
[Accessed 25/05/19].