Essay Example on According to the assignment the Great Service Cleaning and Maintenance

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According to the assignment the Great Service Cleaning and Maintenance company GSCM being in the business of contracting cleaning and maintenance services to office buildings presented its 2013 2014 Balance Sheet and Income Statement These financial statements are useful for investors creditors and other external users to determine key trends and support many important financial decisions We are going to perform a ratio financial analysis to establish significant relationships changes and trends Reviewing trends and common size analysis can help us give an access to perform a financial ratio analysis of the given company by measuring its profitability gross profit margin profit margin return on assets return on equity short term liquidity current ratio and long term solvency debt ratio First we consider the profitability of the company by comparing information with relevant benchmarks in the income statement the summary of a company's profit or loss during 2013 2014 given a period of time to track revenues and expenses For example the service contract revenues have increased in 2014 by 54 in comparison with 2013 and gross profit by 64 respectively see attachment Gross profit ratio is gross profit expressed as a percentage of net sales and is computed as gross profit divided by net sales In 2014 it is 22 65 generating about 23 cents for every revenue dollar and in 2013 it is 21 25 although according to CSIMarket 2017 the average industry rate is 55 62 It shows that company remains reasonably stable from one period to the next 



The huge increase in revenue may be explained by an increase in contracts and or the company started its business not from the beginning of 2013 To verify if the company retain its revenue as profit profit margin ratio we compute net income percentage of net sales by dividing it by net sales Meigs 1999 states the most thriving companies have net income starting from five percent In our case the company has had 2 45 in 2013 and 8 56 in 2014 revenues and a one time gain on sale of equipment It demonstrates the management's ability to control expenses such as general and administrative expenses interest expense and other expenses In the income statement net income is considered to be the most important figure for the company as well as most investors Return on assets ratio evaluates if management has generated a significant return on each dollar of assets Net Income Average Total Assets 830 000 5 957 800 5 025 400 2 15 It means that the business is well managed and able to earn more than the cost of borrowing interest rates range from 6 to 12 as states Meigs 1999 Because shareholders are interested in earning the return on equity investments we can compute how much net income was generated from each dollar of stockholders equity as follows Net income Average Total Stockholders Equity 830 000 2 187 500 1 357 500 2 47 rounded It is much higher than its return on assets 15 percent demonstrating positive financial leverage At the same time highly leveraged business tend to be riskier according to One of the reasons is the company's borrowing that increased assets to generate more profit It is time to go deeper regarding the financial standing 



The debt ratio is an indicator of the amount of leverage used that measures the assets financed by creditors It evaluates long term credit risk while revealing the equity position The company has a lower ratio in 2014 0 6 in comparison with 2013 0 7 It demonstrates that the fewer assets were funded by creditors in 2014 and higher contribution was provided from stockholders no dividends paid in 2014 According to Meigs the most profitable American companies usually have a debt ratio under 50 1999 p 620 It explains that the company has a low financial flexibility and needs to reduce some accrued liabilities suppliers costs employee bonuses The current ratio will help us understand the company's current debt paying ability In the given balance sheet in 2013 it is 1 21 for every dollar in current liabilities whereas in 2014 its increased data 1 47 reveals that it has sufficient assets to cover current liabilities having the industry average as 1 29 CGI 2018 Using ratio analysis we face the certain limitations as assets at historical cost no market price per share for investors to categorize the market cap and the aggregate value lack of qualitative factors and no notes to disclose more information Discussing limitations of the provided information we can ask the management when the company started the business If not then what are the reasons for a huge increase in revenue prices more contracts Why do they have idle cash in excess without being distributed to shareholders Drawing quick conclusion about very high return on common shareholders equity without a thorough review of the full company's data can give us inaccurate information regarding the financial position of the business We would recommend to lower long term borrowing risk and stop piling up cash to improve profitability efficiency and debt financing As known the financial statements are all related Any changes in assets and or liabilities on the balance sheet are reflected in the revenues and expenses on the income statement and can result in the company's gains or losses We have to understand the characteristics of the company and industry in order to evaluate the financial position and predict the future prospects of the business To interpret any financials correctly we have to be aware of not only digging into ratios but also making a trend common size analysis as well as any non financial information



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