Financial Statement Analysis of

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Page count 9
Word count 2559
Read time 10 min
Subject Business
Type Essay
Language 🇺🇸 US


The companies selected for review is and Webjet. Both companies are in the same sector therefore the financial statements are comparable. The report provides details of analysis, which can be used by the management, creditors and investors. However, this report is solely meant for potential investors who may be wishing to invest in the share of the company. At the end of report, a recommendation has been made advising a potential investor to invest in the shares.

Financial analysis of Company

Even in tough economic times, the Company is still remarkably strong around the market. The financial analysis of the company shows that it utilizes its brand and financial strength to achieve long-term sustainable growth.


We shall begin with the liquidity ratios for both holding limited and Webjet. In the liquidity ratios

Ratio 2006 2007 2008 2009 2010 Position
Current Ratio 1.2 1.29 0.6 0.76 0.78 Weakness, it shows that the company is not in position to pay off its short-term obligation. The ratio is decreasing.
Quick ratio 1.2 1.29 0.6 0.76 0.78 Weakness ,the company is not able to use its near cash to extinguish its current liabilities

The ratio is in the declining position and the company has the same quick ratio as current ratio because it does not have stock in their books. The reason of declining of this ratio was due to the financial crisis that affected the industry. The industry was affected by the financial crisis something that was contributed to the decline of the ratio. The net working capital of both companies is positive. Since they does not have any accounts, receivables therefore no comparison can be made between companies. This ratios is important to all stakeholders of the company both in short-term and long-term. This ratio has take the following trend

The trend of ratio

Debt Utilization Ratios

These ratios show the capital structure of the company. It helps stakeholder understand the component of the capital structure of the company. In this case, I will use long-term debt to total capitalization, total debt to total capitalization, total debt to equity, asset advantage. Considering these ratios, there is a clear indication that the company was reducing reliance on debt because the value of debt is on downward trend. The trend taken by these ratios is due to decision made by the management. The management will decide the type of capital structure they will need, however, to raise credit from the member of public credit rating plays an important role. The ratios of holdings limited are shown below:

2006 2007 2008 2009 2010
Total debt to total capitalization 0.61% 0.35% 0.17% Strength, the company does not rely fully on funds from creditors.
Long-term debt to total capitalization 0.41% 0.20% 0.13% Strength, the company tends to have strong operating capital and has no problem in financing hence this concept lead to high earnings. It shows the company has been aggressive in its growth with debt.
Total debt to equity 0.6% 0.4% 0.2% Strength, it shows the company is using very little portion of debt to pay for permanent financing in the company.
Asset Leverage 5.36 3.08 2.97 3 2.67

The ratio value for both companies is above one that implies that these companies are relying heavily on external debt for finance their business operations. Both companies are not able to raise equity from their business and therefore have to rely on borrowing at higher interest rates. Their inability of manage their business well is also reflected from times interest earned. Both companies are only earning operating income that is almost 2.5 times their interest payments. This could lead to further difficulties for both companies if their interest payments are not being by operating income in the future periods.

The company appears to be reducing the credit usage and these ratios have taken the following trend:

The company reducing the credit usage

The trend taken asset leverage is as shown below.

The trend taken asset leverage

The ratio is on a downward trend because the management reduced the reliance on credit financing of the operation. The reduction in the credit financing has helped the company reduce the risk of bankruptcy. A higher ratio will mean that the company is at the risk of collapsing. This move by the company to reduce the reliance on usage of debt is acceptable by many.

Coverage ratio

2006 2007 2008 2009 2010
Time-interest –earned Ratio 449.1 1248.8 Strength, A high ratio means high earnings are available to cater for interest payments of the business. With such high figure, the company is less vulnerable.

This ratio is very high that financiers of the company will not fear financing since it is a large positive.

Profitability ratios

The profitability ratios of this company shows that the company has improved in profitability although marginally. This ratio help a company understand how there utilize asset in generating shareholders wealth. Return on equity of the company has improved for the years. Return on equity of the stock is the percentage in profitability to the shareholders equity. Our company performed well in this ratio as compared to the competitor.

2006 2007 2008 2009 2010
Gross profit margin 36% 39% 37% 36% 39% Strength ,its shows the company is able to pay its operating expenses and build a sustainable future
Operating profit margin 36.3% 39.2% 36.7% 35.9% 38.9% Neutral, the figure shows the company as considerable operating and pricing effectiveness and it is successful in controlling its costs. With the figure ,the company can lower fixed costs and effective gross margin
Return on sales 50.9% 56.3% 52.1% 51.3% 54.1% Neutral, the margin is considerable in that the company seems to be in relative control over its costs.
Return on stakeholder equity(ROE) 117.64% 89.68% 61.56% 61.16% 61.63% Strength, it means the company is spending little amount of money on raw material hence considerable amount of funds is spared. The figure is also used to establish the profit gained per dollar unit on the stakeholder investment. In this company, it means it gains $0.153 per dollar of stakeholder’s investment.
Weakness, Technically this ratio is used to analyze how well the company investments have generated revenue. This value shows the company returns on assets is considerably low. In addition, it means that the company is not converting its investments into profits effectively.

These ratios improved from time to time. The improvement of these ratios is a result of increase in revenues of the company and its activities. Its show although they was a financial crisis the company performed excellently well. The competitor Webjet limited did not perform the same way this company performed although it showed an upward trend in the activities of their trends.

Return on Equity

The following graph shows the trend for each ratio for the two companies. In this the debt to total assets for is declining at a slower rate which means that it is basically financing through is equity but when looking at the industry norm it shows that it is increasing which means that they are facing a higher risk even when the interest rate of the market is high. In the other hand when it comes to return on equity it shows that the is declining slowly which means it is using its debt in the right way but when looking at the industry average it keeps on fluctuating, which means that it does not have a steady flow with the return on equity (Wild, Brnstein, Subramanyam, 2001).

The trend for each ratio for the two companies

This ratio although declining in the case of it is very high and still shows that the company is very profitable as compared to the competitor Webjet limited.

Operating Efficiency Ratios

Asset Turnover 24.0 12.2 0.9 1.1 1.1 Neutral, the level shows that the company sales are low and that the investment on equipments and plants is too much.
Strength, the company tends to have low asset turnover, thus it show the company efficiency in generating revenue or sales.
Inventory turnover 8.3 11.2 5.6 8.6 7.7 Neutral, A high ratio mean strong sales but also it is dangerous for the reason that it characterizes an investment with minimal return rate. The value symbolizes trouble in the event of reduction in prices.
Receivable Turnover Ratio 24.4 35.0 18.1 28.4 26.7 Neutral, it means the company spends considerable amount of time to collect credit sales. It also means the company is generating more revenue from cash sales than credit sales
It demonstrates the company effectiveness in extending credit to clients and collection of funds from debtors.


Looking at the valuation ratios of the company one will note that they were not stable over the period since they increased at one point and at other point, they were decreasing. These ratios are very important in determining the success of the company. Any potential investor will need to consider these ratios because they give a valuation, which will be attached to the company.

Valuation Ratios
EPS $0.081 $0.130 $0.166 $0.209 $0.253 Strength, the company earning per share is double the share invested and this means the company is performing very well.
Dividend per Share $0.010 $0.130 $0.150 $0.175 $0.215 Strength, dividend per share has tremendously grown and doubled from the period of 2006 to 2010.
P/E Ratio 46.13 45.41 19.33 21.64 19.80 Strength, the value shows that the market value of the shares earns 16 times more. This is sign of profitability and better market.
P/B (price to book) Ratio 54.26537 40.72639 11.89894 13.23539 12.19926 Strength ,the company earning per share has grown by more than 100 % for the period ranging from 2006 to 2010
Dividend Payout Ratio 12% 100% 91% 84% 85%
Dividend yield 0.3% 2.2% 4.7% 3.9% 4.3%

Horizontal Analysis

Balance Sheet (Amounts in $’000) 2006
Current Assets:
Cash and cash equivalents 0.8131721 0.775919 0.568446 0.230909 0.3364419
Trade and other receivables 0.0450587 0.038362 0.026169 0.036402 0.0407997
Other assets 0.0029969 0.003855 0.010208 0.003463 0.0023314
Available-for-sale financial assets 0.185611 0.517378 0.4189155
Total Current Assets 0.8612277 0.818136 0.790435 0.788152 0.7984885
Non-current Assets:
Other financial assets 0.0038857
Property, plant and equipment 0.0055706 0.019817 0.02228 0.020659 0.0218764
Deferred tax assets 0.0465042 0.021668 0.07513 0.065005 0.0485516
Intangible assets and goodwill 0.0866975 0.140379 0.112155 0.126184 0.1271978
TOTAL NON-CURRENT ASSETS 0.1387723 0.181864 0.209565 0.211848 0.2015115
Total Assets 1 1 1 1 1
Liabilities and Shareholders’ Equity
Current liabilities:
Trade and other payables 0.0462927 0.07071 0.103324 0.095473 0.1493851
Interest bearing liabilities
Income tax payable 0.00613 0.041832 0.03754 0.0236055
Other liabilities 0.004645 0.000484
Provisions 0.0045482 0.007518 0.013503 0.014241 0.0119096
Total current liabilities 0.0508409 0.084358 0.163304 0.147763 0.1849002
Non-current liabilities
Deferred tax liabilities 0.0161478 0.031191 0.026007 0.031001 0.030658
Interest bearing liabilities
Provisions 0.0030321 0.005436 0.000405 0.000872 0.0012628
Total non-current liabilities 0.019180 0.036627 0.026412 0.031873 0.0319209
TOTAL LIABILITIES 0.070021 0.120985 0.189716 0.179636 0.2168211
Contributed equity 1.0631809 0.855689 0.622998 0.57083 0.4988052
Retained Earnings 0.158956 0.219429 0.2555808
Accumulated losses -0.158058 -0.01878
Reserves 0.0248563 0.042102 0.028329 0.030105 0.0229838
Non-controlling interests 0.0058285
Total Shareholders’ Equity 0.9299792 0.879015 0.810284 0.820364 0.7831983
Total Liabilities and Shareholders’ Equity 1 1 1 1 1

The common size balance sheet and income statement can be supplemented by the expression of items as trends from a base year. For limited, the base year is 2006. Items for the five subsequent years are expressed as an index relative to that year. If statement item were $ 22,500 compared with $ 15,000 in the base year, the index would be 150. The table above is an indexed balance sheet and an income statement. In the first of this table, the buildup in cash from the base year is particularly apparent, and this agrees with our previous assessment. Note also the large increase in accounts receivable and inventories from 2006 to 2010. The latter was not apparent in the common size analysis. To a lesser extent, there was a sizable increase in fixed assets. On the liability side of the balance sheet, we note the large increase in accounts payable as well as in other current liabilities that occurred from 2006 to 2010. This, coupled with retained earnings and the sale of common stock, financed the large increase in assets that occurred between these two points in time.

In the income statement, it is looked on the Net Income, EBIT, Gross profit and Sales of the firm. The gross profit of the firm is reducing from 2006-2010 which can be caused due to the cost of production and it is very bad for the firm. The firm should start implementing the method of cost controlling which means that by reducing the wages and other overheads so that it can be help the firm in a much better way. For the cutting down the cost is very important for their better survival in the market. Even when it comes to the administration expenses and other expenses there was not any increase or decrease (White, Sondhi and Fried, 1997).

The indexed income statement in table above gives much the same picture as the common size income statement, namely fluctuating behaviour. The sharp improvement in 2009 profitability is more easily distinguished, and the indexed statement gives us information on the magnitude of absolute change in profits and expenses. With the common size statement, we have no information about how total assets or total sales change over time.

The standardization of balance sheet and income statement items as percentages of totals and as indexes to a base year often gives us insights additional to those obtained from analysis of financial ratios. Common size and index analyses are much easier when a computer spreadsheet program is employed. The division calculations by rows or by columns can be done quickly and accurately with such a program.

Future Prospects for the Company

Due to the escalating amount of external and internal factors, crises are inevitable. They cause interference with operations and are a source of added demand for products and services. As proceeds into the future, they must be vigilant. The company’s biggest risk exposure includes unpredictable economic and political conditions, customer retention, and relations with foreign countries. In order to be prepared and least effected, must develop strategies that will allow them to remain profitable in an unsteady market. Suggestions would be for to remain current on the risks of a global recession and aware of the current and future relations with foreign countries. Despite the fear of high taxes, the is destined to succeed due to rising disposable incomes, investment diversification, efficient distribution networks, mergers and acquisitions, and the growing populations all around the world. For the future, the company must focus on widening the customer base and focusing on e-commerce. The company may also consider seeking more experienced staff, for the sales floor in the future. Experienced assistance can increase customer service and drive sales.


In regard to analysis of one can comfortably conclude that the company is financially sound. The financial performance of this company is better compared to the competitor. Therefore both creditors and potential investors will wish to associate with this company. However I should note that the company performance in terms of profitability, liquidity was not stable over the period because of the financial crisis, which affected the whole world in the period beginning 2007 to 2009. Forgetting the crisis all departments of the company performed well as compared to the competitors whose financial performance was below

Reference List

White G., Sondhi A., Fried D. (1997). The Analysis And The Use Of Financial Statements. New York: John Wiley & Sons.

Wild J., Brnstein L., Subramanyam, K., (2001) Financial Statement Analysis. Boston: McGraw-Hill.

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