Ratio Analysis Memo
For this assignment we need to choose a virtual organization and prepare a memo to the CEO to discuss the findings from our ratio calculations and also submit a horizontal and vertical analysis for the balance sheet and the income statement. The virtual organization our team chose was Berry’s Bug Blasters.
Listed first in this paper will be the ratio calculations; liquidity, profitability, and solvency.
Solvency Ratios | Debt to Total Assets Ratio | 2007 | 2008 | $ 366,786.29 | 24.5% | $ 306,805.71 | 15.9% | $ 1,498,882.00 | | $ 1,932,041.17 | | | | | | Times Interst Earned | 2007 | 2008 | Unable to calculate because no interst …show more content…
To help grasps the understanding of this ratio analysis we used intercompany comparisons. The ratios used are liquidity, profitability, and solvency.
Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and meet unexpected needs for cash (Weygandt, Kimmel, & Kieso, 2010). Creditors and investors have to see the company’s ability to pay its bills. Bankruptcy analysts and mortgage originators use the liquidity ratios to determine whether a company will be able to continue going.
Profitability ratios measure the income or operating success of a company for a given period of time. Income, or the lack of it, affects the company’s ability to obtain debt and equity financing (Weygandt, Kimmel, & Kieso, 2010). Many business owners need to see the profits, and also analyze any problems within the company. Investors are the primary users of profitability ratios to determine if the company will be profitable enough to earn back their initial investment. Solvency ratios measure the ability of a company to survive over a long period of time (Weygandt, Kimmel, & Kieso, 2010). These ratios indicate the amount of debt a company can handle. Banks and lending institutions are the primary users of the solvency ratio.
In our analysis we found that the current ratio increased from 3.57:1 in 2007 to 5.99:1 in 2008. This ratio means that the company has adequate current assets relative to its current liabilities. For the