Financial Analysis (Stetson Skydiving Adventures)

Question 1

The liquidity of the company reduced between the year 2011 and 2012. This indicates the decrease in the ability of the company of meeting its short-term obligations when they fall due (Peterson & Fabozzi, 2012). This indicated by the reduction in the current ratio from 2.67 in 2010 to 1.83 in 2011. Despite, that a current ratio of more than 1.2 is considered sufficient, the reduction in the company’s current ratio is an indication of liquidity instability. This is further reaffirmed by the reduction in quick ratio from 1.36 to 0.88. This indicates that the company ability to pay its short-term obligation ns when they fall due using the most liquid assets reduced between the years.

The accounts receivable turnover of the company indicates that the company has a long period of collecting cash. The inventory turned only 9 times in 2010 and 8 times in 2011. This means that the company needs to tighten its credit policies or step up its collection practices. The number of times the receivable turned over decreased over the two years. The company’s debt ratio increased between the two years indicating that it relies much on debt to finance its long-term investments. Heavy reliance on debt increases company’s debt obligations like interest payment. The company’s long-term debt to equity is 91.62% and 84.29% in 2010 and 20121 respectively, which indicates heavy debt reliance.

The company showed improvement in profitability with gross profit margin increasing from 33.05% in 2010 to 35.05% in 2011. This shows that the company generated more profit per every unit of sale made in 2011 as compared to 2010. The company return on assets and equity also increased significantly between the two years. This indicates improvement in the sales generation per every single dollar of equity and assets.

Question 2

Company’s ROE (Du-point) = (net income/pre-tax income) + (pre-tax income/ EBIT) + (EBIT/Sales) + (Sales / assets) + (Assets / Equity)

= 18525/95900) + (95900/207900) + (207900/3500000) + (3500000/3100435) + (3100435/1939335)

= 0.65 + 0.46 + 0.06 + 1.13 + 2.23 = 4.53

ROE for 2010 = 0.65 + 0.30 + 0.03 + 0.2 + 0.19 = 1.6

The increase in ROE was caused by the increase in pre-tax income over EBIT, increase in sales over assets and increase in EBIT over sales. The ROE rapid increase stems mainly from the increase in EBIT between the years.

Question 3

Economic Profit is the difference between the received revenue from an output sale and the opportunity cost (the implicit cost) of the used inputs (Vandyck, 2008).

Therefore the economic profit = Accounting profit – Implicit Costs

The accounting profit for the Stetson Skydiving Adventures            was $ 18525 and $ 62335 in 2010 and 2011 respectively. Ther economic profit for the company in 2010 and 2011 is:

Total investment = Cost of sale…………………