Financial Statement Analysis and Report Essay Example | Topics and Well Written Essays - 1500 words

Financial Statement Analysis and Report - Essay Example Although the sales of Grand Company increased from BD7450 in year 5 to BD10660, there was a subsequent increase in the purchases and cost of sales leading to a fall in the gross profit margin. The operating profit margin also fell from 10% in year 5 to 5% in year 6. Grand Company earned a better gross profit of BD3500 in year 6 as compared to the gross profit of BD2915 in year 5. However, this was not sufficient in improving the operating margin of Grand Company as expenses increased drastically from year 5 to year 6. This drastic increase was due to the addition of interest expense on the bank loan taken by Grand Company to inject more funds into the business. Return on capital employed is a measure of assessing how much return a company is generating on the capital that is employed in the business. Grand Company took a bank loan in year 6 and hence had more capital as compared to year 5. However, the additional capital was not used efficiently and this is why the return on capital fell drastically from 12% in year 5 to 6% in year 6. Overall, the profitability of Grand Company deteriorated from the year 5 to the year 6. Grand Company should take measures to increase their revenue and reduce their costs in order to stay profitable and sustain their existence in the business. The liquidity of Grand Company remained stable from the year 5 to year 6. There was not much fluctuation in the current and acid test ratio. The efficiency of Grand Company improved in year 6. The cash conversion cycle improved indicating that Grand Company’s ability to earn cash improved in year 6. Grand Company took a bank loan to inject liquidity into the business which lead to the interest coverage ratio in the year 6. The EPS of Grand Company fell drastically from year 5 to year 6 due to the fall in the net income in year 6. Users of Financial Statements: Objective of Financial Statements is to produce information that is as useful as possible for many different types of users o f financial statements. Users of financial statements include: Investors: a potential investor uses the financial statements to find out if the investment is suitable or not in the prospective company. Analysts: An analyst uses the financial statements and recommends. Shareholders: Shareholders Regulatory authorities: Tax authorities may use financial statements of company to find out if the taxes are calculated in an appropriate manner. Financial institutions: banks and other lending companies assess the financial statements of a company before giving out loans to assess whether the company will be able to honor its obligations Trade Creditors: Trade creditors and vendors who supply goods on credit also use financial statements to assess the ability of a company to repay its short term debts. Owners and managers: they use the financial decision to make important strategic decisions that help the company to grow and