TO: CEO, Company G

FROM: James Adkins, Financial Analyst

SUBJECT: Evaluation of Financial Ratios

DATE: February 1st, 2013

Company G has requested an evaluation to assess the financial stability of the business based on their financial statements from 2011 and 2012. As part of the analysis standard financial ratios were used to assess the condition of various aspects of the company. These ratios were used to compare the condition of Company G as compared to industry averages. The following is a summary of the ratios used, the results of the financial statement summary and the statement of financial stability.

Current Ratio
Current ratio is a measure of a company’s ability to pay short term debts; this ratio includes all current assets as part of the ratio. The current ratio for Company G dropped to 1.77 in 2012 (from 1.86 in 2011), and is just below the median of other companies in the same industry. The drop indicates the company has fewer current assets to cover current liabilities than it did in 2011, it also has less ability to cover liabilities than similar companies. This represents a slight weakness; Company G should work to reduce their liabilities and increase their assets.

Acid-Test (Quick) Ratio
Acid-Test Ratio is a more stringent indicator of a company’s ability to cover current liabilities because it removes the current inventory from the ratio. The acid-test ratio dropped from .64 in 2011 to .43 in 2012. This represents a 32.8% ratio decrease and indicates the company may have less cash on hand to pay off current liabilities. This ratio is also lower than 75% of the companies in the industry data. This is a significant weakness; Company G should be very concerned about its ability to pay off current liabilities if the need arose.

Inventory Ratio
Inventory ratio is the measure by which a company “turns” its