Financial Statement Ratio Analysis

BlueVal understands the importance of creating a positive working capital to sustain its business.

In fact, creating a positive cash flow is a substantial risk to all businesses. The team recognizes

that a negative working capital would lead to bankruptcy.

The senior management team has agreed to expand its operations; therefore, additional capital

resources will be required sooner than anticipated. If the additional capital is not available, it

would more than likely curtail the company's strategic plans. Lisa reasons that the company's

future capital requirements will depend on many factors including market acceptance of services

as well as effective sales that are based on a creative marketing strategy.

Moreover, Lisa suggests that because BlueVal's future relies on continuously developing new

generations of its media solutions, it is likely that the company will have to expand its capacity to

generate new clients to support the company's investment. Accordingly, the company will have to

move out of its West Village headquarters and hire additional media designers. Lisa has informed

Jason and Angelo that they need to carefully consider the risks and difficulties of expansion. She

has persuaded them to hire an outside accounting firm to provide audited financials of the

company's activities to demonstrate the efficacy of BlueVal's business model to prospective

investors.

The company's internal financial statements, along with the independent audited financial

statements will provide important information to potential investors. Many of these statements

include a verbal statement that is often presented as a letter from the president. It describes the

firm's operating results during the past year and discusses new developments that will affect

future operations. The other information presented is quantitative. It consists of the balance

sheet, the income statement, the statement of cash flows, and the statement of retained earnings.

Together, these statements give an accounting picture of the company's operations and financial

position.

Specifically, BlueVal will need to perform a financial ratio analysis. Financial ratio analysis is the

use of financial accounting and other information to assess a company's financial performance

and financial conditions. Financial ratio analysis particularly uses comparisons of financial data in

the form of ratios to assess a company's financial health and profitability.

There are many ratios that companies perform based on available financial data. The question to

be considered is which ratios are the most appropriate. Accordingly, if the purpose of the analysis

is to understand a company's profitabilitythe ratios that relate to returnsprofit margins and

asset utilization would be the most significant. If management wants to assess a company's

effectiveness concerning its credit policies and collections, it would focus on ratios involving its

accounts receivable. Moreover, when evaluating a company's credit worthiness, the task at hand

is to assess the company's debits and compare the with the company's ability to satisfy those

particular obligations.

Ratios are classified into several types based on the company's performance and conditions.

They are

Activity ratios, which are used to evaluate a company's effectiveness in putting its asset

investments to good use.

Liquidity ratios, which measure a company's ability to meet its short-term and immediate

obligations.

Solvency ratios, which gauge the company's ability to meet its debt obligations.

Profitability ratios, which analyze a company's ability to manage its expense to generate

profits from its sales.

Based on the case study, Identify the ratio analyses that need to be performed. Give reasons for your selection.