After completing the previous activity, your supervisor, asked you to interpretation of financial statements using financial ratios for omega company.
Omega Bookshop
Income Statement-comparative statements
December 31.2021 December 31.2022
Net Sale 3640 4990
Cost of goods sold (1920) (2640)
Gross profit 1720 2350
Operating expenses (OPEX):
Salaries and wages expenses 900 1150
Supplies expenses 200 300
Rent expenses 300 400
Utilities expenses 200 300
Total operating expenses (1600) (2150)
Income before interest and tax 120 200
Interest expenses (20) (40)
Income before tax 100 160
Tax (25%) (25) (40)
Net Income (Net loss) 75 120
Omega company
Financial position- Years ended December 31,2021 and 2022
Item 2021 2022
Assets
Current Assets
Cash & Cash equivalent 50 72
Accounts Receivable 180 190
Merchandising inventory 250 320
Prepaid expense’s 10 18
Total current Assets 490 600
Long term investment 200 180
Property plant & equipment (PP&E) 900 1004
Total Assets 1590 1784
Liabilities
Accounts payable 90 235
salaries payable 25 30
Tax payable 25 35
Total current liabilities 140 300
Long term Liabilities 250 250
Total liabilities 390 550
Stockholders’ Equity
Common stock 900 1050
Retained earning 300 184
Total stockholders’ Equity 1200 1234
Total Equity & Liabilities 1590 1784
Additional Information:
• The number of shares equal 500 shares
• The market value per share on 12/31/2022 amounted to 1.50
Interpretation of Financial Statements using Financial Ratios for Omega Company
Financial ratios are essential tools for analyzing a company's financial performance and assessing its overall health. By examining key ratios, we can gain insights into Omega Company's profitability, liquidity, solvency, and efficiency. Let's delve into the financial statements provided and calculate relevant ratios.
Profitability Ratios:
a. Gross Profit Margin:
Gross Profit Margin = (Gross Profit / Net Sales) * 100
For 2021: (1720 / 3640) * 100 = 47.25%
For 2022: (2350 / 4990) * 100 = 47.09%
The gross profit margin remained relatively stable between 2021 and 2022, indicating that Omega Company was able to maintain a consistent level of profitability on its sales.
b. Net Profit Margin:
Net Profit Margin = (Net Income / Net Sales) * 100
For 2021: (75 / 3640) * 100 = 2.06%
For 2022: (120 / 4990) * 100 = 2.40%
The net profit margin improved slightly from 2021 to 2022, indicating that Omega Company was able to generate higher profits relative to its net sales.
Liquidity Ratios:
a. Current Ratio:
Current Ratio = Current Assets / Current Liabilities
For 2021: 490 / 140 = 3.50
For 2022: 600 / 300 = 2.00
The current ratio decreased from 2021 to 2022, suggesting a potential decline in Omega Company's short-term liquidity. However, a current ratio of 2.00 still indicates that the company has sufficient current assets to cover its current liabilities.
b. Quick Ratio:
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
For 2021: (490 - 250) / 140 = 1.57
For 2022: (600 - 320) / 300 = 0.93
The quick ratio also decreased significantly from 2021 to 2022, indicating a potential deterioration in Omega Company's ability to meet its short-term obligations without relying on inventory. A quick ratio below 1.00 raises concerns about the company's liquidity position.
Solvency Ratios:
a. Debt-to-Equity Ratio:
Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity
For 2021: 390 / 1200 = 0.33
For 2022: 550 / 1234 = 0.45
The debt-to-equity ratio increased from 2021 to 2022, indicating that Omega Company relied more on debt financing relative to equity financing during the year. While these ratios suggest a moderate level of leverage, it is important to monitor the trend over time.
Efficiency Ratios:
a. Inventory Turnover:
Inventory Turnover = Cost of Goods Sold / Average Inventory
For 2021: 1920 / ((250 + 320) / 2) = 9.14 times
For 2022: 2640 / ((320 + 250) / 2) = 10.81 times
The inventory turnover improved from 2021 to 2022, indicating that Omega Company sold its inventory more efficiently in the latter year.
b. Accounts Receivable Turnover:
Accounts Receivable Turnover = Net Sales / Average Accounts Receivable
For 2021: 3640 / ((180 + 190) / 2) = 20.22 times
For 2022: 4990 / ((190 +180) / 2) = 27.72 times
The accounts receivable turnover increased significantly from 2021 to 2022, suggesting that Omega Company collected its receivables more quickly during the latter year.
In conclusion,
by analyzing Omega Company's financial ratios, we can observe consistent profitability, a decline in short-term liquidity, a moderate level of leverage, and improvements in efficiency metrics such as inventory turnover and accounts receivable turnover. It is important for Omega Company to closely monitor its liquidity position and take measures to improve its quick ratio. Additionally, managing debt levels and focusing on maintaining profitability will be crucial for the company's long-term financial health.