Financial Statement Analysis: Adventure Sports Ref: Financial

Financial Statement Analysis: Adventure Sports

Ref: Financial Statement Analysis - Adventure Sports

Having listened to your predictions regarding Adventure Sports' chances of success, I decided to analyze the company's financial statements so as to determine who amongst you was right.

Looking at the company's income statements, it is clear that its profitability has been improving over time. While Adventure Sports had a net income of $1,000 in 2007, the same improved to $7,000 and then to $13,000 dollars in 2008 and 2009 respectively. This essentially represents a 1200% increase in the net income figure between the year 2007 and 2009. This is largely impressive. The sales figure also improved significantly within the three years under consideration. The increase in the cost of sales during the period can be attributed to the increase in the sales figure. However, although sales increased by 46.12% between the years 2007 and 2009, cost of sales experienced a 52.86% increase within the said period. This clearly indicates that in the period under consideration, the cost of purchases and direct expenses increased by a greater percentage than that of sales. If this trend is allowed to continue, Adventure Sports risks losing a huge chunk of its sales to costs associated with purchases and direct expenses. This could have a negative impact on its ability to post impressive profits in future -- thus declining to its eventual demise in a few years time. However, if corrective steps are taken sooner than later, i.e. By finding cheaper material, the situation could be remedied and the company will be successful.

A look at the firm's operating profit also reveals an impressive trend -- the same has been on an upward trend during the period under consideration. This is an indication that Adventure Sports has enough cash for growth/expansion and other needs.

To determine whether the firm would be affected if the current profitability trends were to change, it would be prudent to analyze its ability to remain solvent both in the short-run and in the long-run. Of great utility in this case would be the company's liquidity ratios and financial leverage ratios. For purposes of this discussion, I will make use of the current ratio and the debt ratio.

Table 1: Debt Ratio and Current Ratio

Ratio

Computation

Values

Current Ratio

2009

2008

2009

2008

1,349/623

1,277/572

2.17

2.23

Debt Ratio

1,323/1,472

1,272/1,405

0.90

0.91

Analysis

Looking at the table above, it is clear that the company would encounter no challenges settling its obligations. This is particularly the case given that as the current ratio indicates, Adventure Sports has more assets than debt. The company is therefore not likely to encounter liquidity problems even if the trends in profitability were to change significantly (in the short-run).