The $118,650 net income indicates a successful year for Nybrostrand Company. Calculating commonly employed financial statement ratios further enhances the company’s profitability and financial strength.
The 48% gross margin ratio, computed by dividing gross profit on sales by revenue, indicates Nybrostrand will retain $0.48 from each dollar of revenue generated that will be used to cover all other expenses and a possible distribution to shareholders. This 48% gross margin eclipsed the 27% total expenses to revenue ratio enabling the successful year.
The company’s short term solvency is evidenced by a strong 1.3 current ratio. This ratio is computed by dividing current assets (the sum of cash, accounts receivables, and inventory) by current liabilities (accounts payable) and means that Nybrostrand will have the required cash and, if necessary, the means to acquire the necessary cash by selling inventory to meet current liabilities as they become due.
The company’s long term solvency is evidenced by a strong 0.8 debt to equity ratio. This ratio is computed by dividing total liabilities by total stockholder’s equity. Since total liabilities includes both short (due in less than one year) and long term (due in more than one year) obligations, this ratio gauges a company’s ability to meet both, and most importantly, with respect to this ratio, the long term obligations. A debt to equity of less than 1.0 signifies Nyrostrand’s ability to meet their long term debt when it becomes due.
References
Kieso, D. E., & Weygandt, J. J. (1992). Intermediate accounting. New York, NY: John
Wiley & Sons, Inc.
