Financial Statement Analysis: Ratio Computation, Risk, and Cash Flow

This report provides a comprehensive financial statement analysis, focusing on ratio computation, risk assessment, and cash flow management. The analysis includes the calculation and interpretation of key financial ratios like the current ratio and debt coverage ratio, evaluating the company's ability to meet its obligations. It also discusses the implications of debt service coverage ratios for loan approval and potential risks associated with the business, such as the absence of tangible assets. Furthermore, the report examines the company's cash position, highlighting the positive cash scenario and the factors contributing to it. Lastly, the report provides an overview of endowment funds, their structure, and their role in supporting the long-term financial health of non-profit organizations, with references to relevant financial management literature.

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FINANCIAL STATEMENTS

Ratio
Computation of current ratio
Current ratio =
Current Assets/current liabilities 1.661453 1.8281
The current ratio of the company is projected at 1.66 in 2017 while it was 1.82 in 2016. From
the computation it is clear that the company has sufficient assets to meet the obligations. The
standard ratio is 2:1 however it differs from one company to another. Generally a ratio of 1:1
is considered appropriate (Porter & Norton, 2014). From the computation it is clear that the
business has sufficient funds to meet the obligations.
Debt coverage
debt coverage
5.08553
1
5.12885
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Debt coverage
For the qualification of a business loan, it is essential to evaluate the Debt Service Coverage
Ratio and needs to be more than 1.25. Other things being equal the higher the DSCR above
1.25 the greater is the chance for the loan approval. As the DSCR has move ahead 1.25 it
means that the business is making 25% more income as compared than is needed to cover the
debts.
Net worth
As seen from the situation the business has tangible assets that comprise of investments is
intangible assets are not present in the business. Hence debt to tangible net worth cannot be
computed.
Warning signs
Having a good DSCR can enable approval for the loan however, it does not end here. There
are other risks that the business might face. As part of the loan agreement, the lender may
need to keep the debt service coverage ratio at a specific level year over year (Vaitilingam,
2014). If the level of DSCR falls below the prescribed limit then the lender will call the
balance due. This is a risky situation because calling the balance due indicates that the time
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Ratio
frame is short generally 90-120 days to pay the entire balance. If this is not done then it will
be considered as negligent and the lender will take an initiation of the collection proceedings
(Laux, 2014).
Risk associated with the business
Yes, the business has risk because the business contains no tangible assets. In order to
perform effectively, it is essential that the business should comprise of both tangible and
intangible assets. The absence of assets such as goodwill, intellectual property and other
tangible assets pose a threat because they project the net worth of the company. The business
can show this worth with proper documentation and the assets can serve as collateral that
makes it easier for the company to obtain a loan (Ross et. al, 2014)
Cash scenario
As per the financial statements, it can be stated that the business has sufficient cash because
the cash and cash equivalent at the end of the year that is 2017 is higher as compared to the
year 2016. There is net increase of cash at the end of the year. The major reason why there
has been a major shift from the deficit to surplus is owing to the fact that investments are sold
and hence there is a surplus or inflow of cash. Hence, going by the projection of the business
it can be said that the positive amount denotes a positive scenario to the business. In 2017
Cash and cash equivalence at the end of the year is $28788 and this means the business has
closed the accounts on a positive note and for the next year 2018, the business will have
positive cash scenario. The net increase and figures at the end of the year denotes that the
cash position of the business is formidable and hence, the prospect remains good in the
upcoming times.
Endowment funds
Endowment funds are specifically structured in a manner that has strict contractual
obligations, as well as rules. Such needs to be followed by the non-profit organization and the
main aim of the fund is to provide a strong support to the long term financial health of the
non-profit organization and the beneficiaries (Vaitilingam, 2014). An endowment funds can
be defined as an investment fund that is established by the foundation and regular withdrawal
is made from the capital that is invested. The capital that is present in the endowment
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Ratio
funds are mostly used by the universities, non profit organization and hospitals. It is utilized
by the company for the specific needs of the company and helps in the process of operating.
Such funds are funded by donations that are deductible for the donors.
Financial endowments are tuned in a manner so that the principal that is invested remains
intact and the investment income can be used for funding on an immediate basis so that
the non profit company can operate in a smooth fashion. For endowments that are structured
a portion of the principal is released every year and the donation has a bearing over a long
time frame (Petty et. al, 2012).
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Ratio
References
Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012)
Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education
Australia.
Porter, G. and Norton, C. (2014) Financial Accounting: The Impact on Decision Maker.
Texas: Cengage Learning
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014)
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Vaitilingam, R. (2014) The Financial Times Guide to Using the Financial Pages. London: FT
Prentice Hall.
Laux, B. (2014) Discussion of The role of revenue recognition in performance reporting.
Accounting and Business Research. [online]. 44(4), 380-382. Available from:
http://www.ccsenet.org/journal/index.php/ijbm/article/viewFile/4235/3672 [Accessed 28
August 2018]
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