# Financial Analysis of a Company

Pages: 4 (1821 words) Published: November 2, 2014
MEMORANDUM
Date: November 9, 2013
To:

Chief Executive Officer

From:
RE:

COMPANY G – FINANCIAL ANALYSIS YEAR-12

CURRENT RATIO
The Current Ratio is used to identify whether or not a company can pay its current obligations. This ratio takes into consideration the current assets and current liabilities from the balance sheet and measure the company’s ability to pay their short-term liabilities. In most cases higher the ratio the more able the company is to paying their current obligations and is much more desirable. The Current Ratio calculation is as follows: Current Ratio equals Current Assets divided Current Liabilities. Company G has a Current Ratio for YR12 of 1.77. Comparing YR12 to YR11 the company’s Current Ratio declined a bit from 1.86 last year. The industry quartile data of 3.1, 2.1 and 1.4 shows that the resulting 1.77 is between the median and 1st quartile. This ratio shows a weakness in Company G current ratio matrix.

ACID-TEST RATIO
The Acid-test Ratio or Quick Ratio is similar to the Current Ratio but is much more strict by removing inventory from the current assets in the formula. It measures if a company has enough short-term assets to cover current liabilities excluding inventory. With the acid-test, assets include Cash, Accounts Receivable and Short-term investments and is compared to Current Liabilities. A higher Acid-Test Ratio is desired and should be near 1. A 1.00 result would show that a company can meet their most current obligations. The formula to calculate the Acid-Test Ratio looks like this: Acid-Test Ratio equals the sum of Cash, Short Term Investments and Accounts Receivable Net divided by Current Liabilities. YR12 Acid-test ratio for Company G is 0.43 which is down from 0.64 in YR11. The industry quartile data of 1.6, 0.9 and 0.6 shows that Company G is well below the 1st quartile in the industry. This is a weakness in Company G and should be evaluated further.

INVENTORY TURNOVER
Inventory turnover ratio...