Question

An associate is running a business (coffee and soup shop) and presents do you to financial statements for the company below.

They are very excited about expanding (to another location) and would like to borrow some more money from you so that they can expand their bussines

Have a look at their income statement and balance sheet, and ask one or two questions to your associate that you would like to find out before deciding if you will give them a loan

 

Answer 1

Ratio Analysis
Profitability ratio
operating profit ratio	operating profit/sales	25500/82000	31.10%
operating profit	82000-35000-15500-6000	25500
sales		82000
Net profit ratio	Net profit/sales	15500/82000	18.90%
Liquidity ratio
Current ratio	total of current assets/total of current liabilities	(5000+35000+75000)/(32000)	3.59
Quick ratio	total of quick assets/total of current liabilities	(5000+35000+)/(32000)	1.25
Solvency ratio
Debt ratio	total of liabilities/total of assets	(32000+50000)/315000	26.03%
Debt equity ratio	total of liabilities/total of equity	(32000+50000)/(170000+63000)	35.19%

 

From the above ratio analysis, it can be concluded that the company's profit-earning capacity is positive and the company is earning 18.9% of the profit on its revenue. The liquidity position of the company is good as its current ratio is 3.59 and quick ratio is 1.25 so the company has enough liquid assets to pay its short-term liabilities. The solvency position of the company is also good as only 26.03% of debt is used in the financing of total assets and debt is only 35.19% of the total equity of the company. Thus we can conclude that the company is profitable, and has sound liquidity and solvency position.

Profitability ratio 31.10%.