Ratio Analysis For Great Service Cleaning And Maintenance Company
There are four categories of ratio analysis that measure different aspects of a company’s operations: profitability, short-term liquidity, long-term solvency, and market valuation. For this assessment, I calculated five financial ratios: gross profit margin, current ratio and quick ratio, and debt ratio and debt to equity ratio (Heisinger & Hoyle, 2012).
Profitability Ratios Profitability ratios are used to find the profitability trends of a company. This is vital information for analysts, …show more content…
The gross profit margin measures the first level of profitability which compares the gross profit to total revenue. It is calculated by subtracting the total cost of goods sold (COGS) from the total revenue and then dividing it by the total revenue (Investopedia, n.d.). For 2013, the gross profit margin is 21.25% and for 2014 it’s 22.65%. Please refer to Appendix A for the calculations. The increase in the gross profit margin from 2013 to 2014 shows that our COGS are decreasing proportionally to our revenue meaning production is costing less. This could be a good sign of efficiency.
Short-term Liquidity Ratios Suppliers and other short-term lenders often want to know whether or not a debtor can meet their debts. There are four ratios used to determine this (Heisinger & Hoyle, 2012). I calculated the current ratio and quick ratio for this assessment. Current ratio. The current ratio determines a company’s ability to pay off short-term debt with current assets in either liquid or illiquid form. The ratio is calculated by dividing total current assets by total current liabilities. The ratio for 2013 is 1.205:1 and for 2014 is 1.472:1. For calculations, please see Appendix B. The increase in the ratio shows that current assets grew faster than current debt. This is a positive sign for short-term lenders as the company is better positioned to cover its debt making it a safer …show more content…
Similar to the debt to assets ratio above, it compares the total debt to total owner’s equity to determine the proportion of ownership to debt. I can be found by dividing total liabilities by total owner’s equity (Heisinger & Hoyle, 2012). The debt to equity ratio for 2013 was 2.702:1 and for 2014 it was 1.724:1. Please see Appendix C for calculations. Similar to the debt ratio, this reduction in total liabilities compared to ownership of the company is a positive trend. The company is successfully reducing its debt burden and likely increasing its stock value. This trend would please investors.
There are many limitations with the information these ratios can provide. Liquidation and solvency are estimated values as assets may not be able to be sold at value. As a safeguard, lowering quick ratios and debt to equity ratios for example are ideal.
The Great Service Cleaning and Maintenance Company had a fantastic fiscal year. Net income grew by over 400%, cash approximately doubled, assets increased by nearly 20%, stockholder’s equity grew by over 60%, and their proportion of current and total debt decreased. Their assets were able to increase due to their revenue increasing over 50%. They should continue on this