Financial Analysis: Good and Bad News for the ABC Business
The first positive change for ABC is the increase in its net income, which rose by 10%. The statistic indicates that the company has either increased its sales, reduced its expenses, or achieved both, all of which would be positive outcomes. The receivable turnover is another improvement that warrants attention, having increased from 5 to 7. It highlights the company’s superior ability to collect on its outstanding debts compared to a year ago, possibly due to reliable customers or efficient collection practices.
Lastly, the purchase of two new machines is beneficial to the company. They will either expand their manufacturing (or other) ability, helping generate further profits or replace aging equipment, improving the quality of the services rendered. In any case, the company’s operational performance should improve as a result of the purchase, which should be reflected in its future financial results. With that said, the lack of information concerning the machines’ specific nature and function means that they may not have a noticeable impact on the company. They could be old and inefficient, or they could be small and contribute little to the business.
The first negative change is the decline of the current ratio from 2.5 to 2. Weygandt, Kimmel, and Kieso define it as the result of dividing current assets by current liabilities, which means a decrease in the ratio implies a loss of assets or an increase in liabilities, both of which are problematic. The second issue is the change in the debt/total assets ratio, which has risen to 4 from 3. The indicator is self-explanatory and implies that the company will struggle more with its debt in the immediate future.
Lastly, the reduction in the return on assets has fallen from 14.8% to 13%. One possibility is that the company’s assets have increased, though that would conflict with the two other problematic ratios, and the other is that its profits have fallen, which is a significant issue.