Financial Ratio Analysis of Garfield, Inc.

  Financial Ratio Analysis of Garfield, Inc. Introduction Financial ratios are essential tools for analyzing a company's performance and financial health. By comparing ratios over different periods, stakeholders can identify trends, strengths, and weaknesses within the organization. This essay will compute and analyze several financial ratios for Garfield, Inc. for the years ended December 31, 2018, and 2017. The calculated ratios will provide insights into the company's liquidity, profitability, leverage, and market performance. Financial Ratios Computation Year 2018 1. Current Ratio [ \text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}} = \frac{373,000}{227,000} \approx 1.64 ] 2. Cash Ratio [ \text{Cash Ratio} = \frac{\text{Cash}}{\text{Total Current Liabilities}} = \frac{99,000}{227,000} \approx 0.44 ] 3. Times-interest-earned Ratio [ \text{Times-Interest-Earned} = \frac{\text{Income Before Income Tax} + \text{Interest Expense}}{\text{Interest Expense}} = \frac{74,000 + 9,000}{9,000} \approx 9.22 ] 4. Inventory Turnover [ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} = \frac{241,000}{\frac{146,000 + 164,000}{2}} \approx 1.67 ] 5. Gross Profit Percentage [ \text{Gross Profit Percentage} = \frac{\text{Gross Profit}}{\text{Net Sales Revenue}} \times 100 = \frac{220,000}{461,000} \approx 47.7% ] 6. Debt to Equity Ratio [ \text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Stockholders' Equity}} = \frac{344,000}{142,000} \approx 2.43 ] 7. Rate of Return on Common Stockholders' Equity [ \text{Rate of Return} = \frac{\text{Net Income}}{\text{Common Stockholders' Equity}} \times 100 = \frac{56,000}{142,000} \approx 39.44% ] 8. Earnings per Share (EPS) [ \text{EPS} = \frac{\text{Net Income}}{\text{Common Shares Outstanding}} = \frac{56,000}{14,000} = 4.00 ] 9. Price/Earnings Ratio [ \text{Price/Earnings Ratio} = \frac{\text{Market Price per Share}}{\text{EPS}} = \frac{69.36}{4.00} \approx 17.34 ] Year 2017 1. Current Ratio [ \text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}} = \frac{385,000}{246,000} \approx 1.56 ] 2. Cash Ratio [ \text{Cash Ratio} = \frac{\text{Cash}}{\text{Total Current Liabilities}} = \frac{98,000}{246,000} \approx 0.40 ] 3. Times-interest-earned Ratio [ \text{Times-Interest-Earned} = \frac{\text{Income Before Income Tax} + \text{Interest Expense}}{\text{Interest Expense}} = \frac{65,000 + 13,000}{13,000} \approx 6.00 ] 4. Inventory Turnover [ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} = \frac{211,000}{\frac{164,000 + 146,000}{2}} \approx 1.30 ] 5. Gross Profit Percentage [ \text{Gross Profit Percentage} = \frac{\text{Gross Profit}}{\text{Net Sales Revenue}} \times 100 = \frac{213,000}{424,000} \approx 50.24% ] 6. Debt to Equity Ratio [ \text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Total Stockholders' Equity}} = \frac{346,000}{122,000} \approx 2.84 ] 7. Rate of Return on Common Stockholders' Equity [ \text{Rate of Return} = \frac{\text{Net Income}}{\text{Common Stockholders' Equity}} \times 100 = \frac{41,000}{122,000} \approx 33.61% ] 8. Earnings per Share (EPS) [ \text{EPS} = \frac{\text{Net Income}}{\text{Common Shares Outstanding}} = \frac{41,000}{12,000} = 3.42 ] 9. Price/Earnings Ratio (Assuming the market price for 2017 is the same as the market price for December 31): ( P/E Ratio = 38.04 / EPS (3.42) ≈ 11.12 (Note: The actual market price may vary) \ Conclusion Analyzing the financial ratios of Garfield Inc. for the years 2018 and 2017 reveals significant insights about the company's performance over time. An increase in the current ratio suggests improved liquidity in 2018 compared to 2017. Furthermore, the reduction in interest expense has positively affected the times-interest-earned ratio, indicating a stronger ability to cover interest obligations. The gross profit percentage indicates a decline from 50.24% in 2017 to approximately 47.7% in 2018; however, the net income increased significantly from $41,000 to $56,000 during this period. The debt-to-equity ratio indicates that Garfield is becoming more leveraged but remains manageable. Overall, Garfield Inc.'s financial health shows positive trends in profitability and liquidity from 2017 to 2018 while reflecting areas that require monitoring and improvement in operational efficiency and cost management strategies moving forward.

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