Financial Report: An analysis of Financial Ratios from the Balance Sheet

Financial Report: An analysis of Financial Ratios from the Balance Sheet

Financial Report

Option B: Balance Sheet Evaluation

Introduction

In this financial report, the analysis of W’ School will be conducted, and specifically, the analysis will be on the organization balance sheet where financial performance metrics will be calculated and discussed based on the annual trends. Therefore, it will be easy to state whether the organization is financially healthy or not.

Ratio Analysis

The first financial ratio to be analyzed will be the current ratio. The current ratio is computed by dividing current assets by its current liabilities in the prevailing fiscal period (Mulyadi, & Sihabudin, 2020). With reference to the balance sheet of the organization, in 2015, the current assets were recorded at 1262483, and the current liabilities, which were represented by creditors, were 841555. Therefore, the division of the values above is 1.5. In the next fiscal period, 2016, the current assets were valued at 981104, and the current liabilities, which were also represented by creditors, were recorded at 428967. Therefore, the division, which represents the current ratio of 2016, is 2.3. The current ratio is a liquidity ratio and, at the same time, an efficiency ratio, which measures the firm’s ability to pay off its current obligations using the available current liabilities (Ainsworth & Deines, 2019). Therefore, the rising trend of the ratio from 1.5 to 2.3 means the organization can meet its current obligations.

The second financial metric to be evaluated is the working capital. The working capital value is calculated by subtracting current liabilities from the current assets (Le, 2019). If an organization has current assets, which is equivalent to its current liabilities, then the organization has no working capital. The metric is an indicator of whether an entity is a position to meet its bills, which includes its payroll obligations; hence, the higher the value, the greater the ability to meet its outstanding bills (Malm, & Sah, 2019). In 2015, the current assets were 1262483, and the current liabilities were 841555; thus, the working capital in 2015 was 420, 928. In 2016, the current assets were 981104, and the current liabilities, which were also represented by creditors, were recorded at 428967; hence, the working capital value was 552,137. Therefore, the rise in trend of the working capital value is a positive trend that signifies the entity can service its bills comfortably; thus, it is financially healthier.

The third ratio on analysis is the return on assets ratio. The ratio is computed by dividing total net income by the average total assets and finding its percentage (Strouhal, Štamfestová, Ključnikov, & Vincúrová, 2018). In 2015, the total net income of the school was (80034), and the average total assets were 2,193,866; thus, the percentage return on assets was -3.65%. In 2016, the total net income was (691079), and the average total assets were 1,002,399; hence, the percentage return on assets was -68.94%. Both returns on asset percentages are negative values since the net income recorded in both fiscal periods was negative. However, the negative return on assets value extended to a higher negative value, which means the financial situation becomes worse from 2015 to 2016. The trend above was contributed by a significant negative net income value, which was eight times greater than that in 2015. Therefore, in terms of creating value for the assets to ensure profitability, the school was doing poorly.

The last financial metric is the debt ratio of the school. The ratio is computed by dividing total liabilities by the total assets (Dafermos, 2018).  In 2015, the total liabilities were 841555, and total assets were 2,193,866; hence, the ratio was 0.38. In 2016, the total liabilities were 428967, and the total assets were 1,002,399; thus, the ratio was 0.42. The increase in the debt ratio is usually an indication of poor financial health. However, the change of ratio was insignificant, and since all the ratio is below the benchmarked 0.5 value, then the school is said to be financially stable.

REFERENCES

Ainsworth, P., & Deines, D. (2019). Introduction to accounting: An integrated approach. John Wiley & Sons.

Boronenkova, S. A., Mironova, O. A., & Popov, A. Y. (2020, January). Assessment of Liquidity Ratios as Indicators of an Organization’s Economic Security: Accounting Aspects. In First International Volga Region Conference on Economics, Humanities, and Sports (FICEHS 2019) (pp. 156-160). Atlantis Press.

Dafermos, Y. (2018). Debt cycles, instability, and fiscal rules: a Godley–Minsky synthesis. Cambridge Journal of Economics, 42(5), 1277-1313.

Le B. (2019). Working capital management and firm’s valuation, profitability, and risk. International Journal of Managerial Finance.

Malm, J., & Sah, N. (2019). Litigation risk and working capital. Managerial Finance.

Morales-Díaz, J., & Zamora-Ramírez, C. (2018). The impact of IFRS 16 on key financial ratios: a new methodological approach. Accounting in Europe, 15(1), 105-133.

Mulyadi, D., & Sihabudin, O. S. (2020). Analysis of Current Ratio, Net Profit Margin, and Good Corporate Governance against Company Value. Systematic Reviews in Pharmacy, 11(1), 588-600.

Strouhal, J., Štamfestová, P., Ključnikov, A., & Vincúrová, Z. (2018). Different Approaches to the EBIT Construction and their Impact on Corporate Financial Performance Based on the Return on Assets: Some Evidence from Czech TOP100 Companies. Journal of Competitiveness, 10(1), 144.

Tian, J., & He, S. (2016, August). Financial Analysis: Current Situation and Development Trend—Review and Evaluation of Corporate Financial Analysis. In 2016 International Conference on Education, E-learning and Management Technology. Atlantis Press.

Zimin, N. E., Karzaeva, N. N., Rokotyanskaya, V. V., Sevastyanova, E. V., & Volodina, N. G. (2018). Multiplicative Model of Return on Assets in Evaluation of Company’s Financial Security. Ad Alta: Journal of Interdisciplinary Research, 8(1).