Managers and business owners can greatly benefit from having knowledge of finance. The accounting and finance department provide important information that managers need to make sound business decisions. One of the most important financial reports that companies must prepare which provide information regarding the financial performance of a firm are the financial statements. The four financial statements are the income statements, balance sheet, statement of retained earnings, and statement of cash flow. This paper analyzes the financial performance of a company by utilizing the income statement and balance sheet of the organization.

It is imperative for a company to maintain good liquidity. Having good liquidity ensures that a business can pay its short-term obligations. A ratio that measures the ability of a company to pay off its short-term debt is the current ratio. The current ratio is calculated dividing current assets by current liabilities. In 2017 the company had a current ratio of 1.48. This result indicates that the company has good liquidity since the current ratio of the company is above the 1.0 threshold. Another ratio that measures the liquidity of a company is the working capital. The working capital ratio shows the ability of a company to pay off its current liabilities solely with its current assets (Investopedia, 2018). In 2017 the working capital of the firm was £120,000 which is a favorable sign.

The organization generated revenues of £2.3 million in 2017. Its revenues decreased by £650,000 or 28% in comparison with the previous year. The net income of the company in 2017 was £132,000, while the previous year the firm generated a net income of £168,000. Both a reduction in revenues and net income are unfavorable signs that demonstrate a reduction in the profitability of the firm. A financial ratio that shows the broad profitability of the company is gross margin. The gross margin of the company in 2017 was 50%. In terms of gross margin, the broad profitability of the company improved in 2017 by 6% in comparison with 2016. The net margin is a financial metric that illustrates the absolute profitability of a firm. The organization obtained a net margin in 2017 of 5.69%. The previous year the firm’s net margin was 0.04% higher.

Return on equity (ROE) is a ratio that calculates how much income a company is generating from its total equity (Kennon, 2017). During 2017 the company had a return on equity of 11.89%. The ROE of the firm the previous year was 1.33% higher. Another performance and profitability ratio that can be used to evaluate the company is return on assets (ROA). The organization in 2017 had a return on assets of 8.15%. The year the company had a ROA of 9.38%. This implies that the return on assets of the company went down by 1.23%. This ratio indicates how much money the company earned from its total assets during a fiscal year. Inventory turnover is a financial metric that demonstrates how many times a company has sold its entire inventory during a year. A high inventory turnover is the desirable outcome. The organization had an inventory turnover in 2017 of 28.75. Days sales outstanding is a ratio that shows how many days it takes to sell off a company total inventory. In 2017 it took the company less than 13 days to sell all its inventory.

Companies that are not able to pay off their debt run the risk of becoming insolvent which could lead to a shutdown of operations due to a lack of cash or bankruptcy. A ratio that can be used to measure the ability of a company to pay off its entire debt is the debt ratio. The debt ratio is calculated dividing total debt by total assets. The firm in 2017 had a debt ratio of 0.31. The firm’s debt ratio is relatively low; thus, this indicates that the firm is not too highly leverage. Another way to measure the leverage position of a company is by calculating the debt to equity ratio. This ratio shows how much debt a company has in relation to its total stockholder’s equity (Accountingformanagement, 2017). In fiscal year 2017 the company had a debt to equity ratio of 0.46. The debt of the company is much lower than its stockholder’s equity.

The financial analysis performed on the company showed both positive and some negative signs. The company during 2017 had a reduction of both revenues and net income in comparison with the previous year. A firm that loses revenues is a worse competitive position because other companies took market share away from them. In terms of profitability the gross margin and net margin of the company are good. The slight reduction in net margin of 0.04% is insignificant. The ROA and ROE of the company indicate that the company has done a fair job of both generating net income from its assets and equity. The inventory turnover of the organization of 28.75 is great and its days sales outstanding ratio is also terrific. In terms of liquidity the business is in a good position to pay off its short-term debt, while the leverage position of the organization is low. Having low debt provides the company with the opportunity of using debt instruments in the future to achieve further growth of the business. Overall the pros associated with the financial performance of the company outweigh its cons. Based on the financial analysis realized my recommendation for a person looking to invest in the company would be to buy the common stocks of this company.