Financial Statement Analysis

¶ … liquidity, the key ratios are the current ratio and the acid-test ratio. These are measures of the firm's ability to meet its coming obligations, based on current asset (current ratio) and current assets less inventories. The current ratio stands at 1.79, down from 1.86 last year. These figures are both below the industry average, and are trending downwards, indicating that performance is sub-optimal. The acid-test ratio is 0.43, compared with 0.64 last year, again a downward trend.

The 0.43 figure puts the company in the lowest quartile of the industry, so the acid-test ratio is a weakness and a point of significant concern. While it is a big hyperbolic to consider a current ratio of 1.79 as a weakness, we should be concerned about the downward trend, especially when couple with such a sharp dropoff in the acid-test ratio. Overall, there is reason to be concerned about the liquidity of the company if we continue trending in the wrong direction.

The inventory turnover is 5.2, compared with 6.1 last year, so trending downward, and in the lowest quartile. Thus, inventory turnover is a weakness. Accounts receivable turnover is 30.4, down from 32.2 times last year, and the current figure is in the lowest quartile, making it an area of weakness for the company. Days' sales receivable is 12 days, up from 11.1 days last year, and in the third quartile. This is not an area of concern. These efficiency ratios are important because they highlight operational areas.

Moving inventory is important because older inventory may become obsolete, and may need to be discounted to be sold. Our inventory turnover is much lower than that of the industry overall, and is trending downward. This might be the biggest weakness of all the ratios. The accounts receivable ratio, likewise, is trending downward and in the bottom quartile, so it is clearly an area of weakness. The debt ratio is 29.54%, up from 28.34% last year, but in the first quartile, so a strength. We have good long-term financial health.

Times interest earned is 35.55 times, versus 31.12 times last year, both figures in the first quartile and therefore a strength. These measures are important because they reflect the long-term financial stability of the organization -- too much debt makes the organization riskier as an investment, but in the case of Company G, there is a lower amount of debt than for comparable firms in the industry. Investment returns reflect the ability of the company to convert sales, assets and equity into profits.

These are particularly important measures for investors, in particular the industry context, because investors may well be choosing among stocks in the category. Return on sales is 6.21%, up from 5.43% last year, and in the second quartile, a strength to me because of the upward trend. Return on total assets is 13.32%, up from 12.3% last year, in the second quartile, thus I will consider it a.