We use the ratio analysis method to explain the financial statement of the business.
Firstly, we focus on return on equity. ROE = *100 = *100=14.81%. The number is high comparing with 5% of generalization. This means the shareholders have got a return of 14.81 cents profit for each $1 they have invested in the firm. According to this ratio, the manager can suggest the shareholders invest more money in the firm or can find new investors for getting more capital in the future.
Secondly, we look at total asset turnover and profit margin. Total asset turnover = = = 1.85 times. This datum shows that the sale is 1.85 times the value of the average total assets controlled by the firm. Profit margin = *100 = *100 = 4.83%. The information reports that the firm has generated 4.83cents profit before tax for every $1 of sales. We use turnover and profit margin ration together because their relationship is negative. The high turnover is associated with a low profit margin. The opposite will also be true. The manager should decide the compatible level between price and volume for maximizing the profit.
Since the firm is small, the liquidity is important for the firm. Current liquidity explains whether the firm has enough current assets to meet its short term debts. Current liquidity ratio = = = 10:1. The ratio states that the firm has $10 in liquid assets match to every $1 of liabilities within the next 12 months. The ratio usually is between 1:1 and 2:1. Thus, it is unreasonable of this case. This mean the firm has the great financial stability and the low risk for creditors. On the other hand, it also indicates that the firm invests many funds in non-productive liquid assets and generates less profits in long-term. The account of cash at bank was found more than $40,000 from the balance sheet. Therefore, the manager should put the money in long-term…