Write a report commenting on profitability, liquidity, and financial position

1. Write a report commenting on profitability, liquidity, and financial position of the business after this first month of operations in comparison with the cleaning industry averages listed in the table below.

2. Suggest relevant and specific strategies that could improve the store’s operation and financing situations. In your analysis, you may want to include suggestions about marketing practices, advertising policies and financing or investing strategies appropriate to the business and discuss the benefits and limitations of ratio analysis, especially in this context.

Write the report to Larry, up to a maximum of 1,000 words. Word count excludes, if any, table of content, references and appendices. Given the word limit, no executive summary is expected.

Liquidity
The current ratio illustrates the ability to pay current liabilities. After calculation, the current ratio
of the company is 13.209, higher than the industry average of 5.46. This means that the
enterprise has enough current assets to maintain normal business operations and repay
short-term debts. However, if the current ratio is too high, which means the company does not
use of its assets to operate its business reasonable. This situation may affect the company’s
future income.
There are two indicators measures the ability to pay long-term debts, debt-to-equity ratio and
debt-to-assets ratio.
Debt-to-equity ratio is equal to the company’s total liabilities divided by the owner’s equity. The
debt-to-equity ratio of the company is 0.061, lower than the industry average of 2.08. From that
we can know that only a small portion of corporate assets are debt-financed. The debt-to-equity
ratio shows whether a company has the ability to earn enough profits to pay its long-term debts.
If the ratio is too high, the company has a high chance of defaulting on its debts or even going
bankrupt. Since the debt-to-equity ratio of this company is lower than the average level of the
industry, banks are willing to lend money to it and investors are also willing to invest in this
company.
Debt-to-assets ratio also shows whether a company has the ability to pay long-term debts. The
debt-to-assets ratio of the company is 0.058, which is lower than the industry average. The
higher the ratio, the less willing investors are to invest in the company. Because debt-to-assets
ratio shows how much of a company’s assets are financed by debt, which shows how the
financially stable degree a company is.
By comparing these two ratios with industry averages, it means the company has the ability to
pay its long-term debt.
Profitability
Two indicators of a company’s profitability are the profit margin and the rate of return on total
assets.
The profit margin measures the percentage of each dollar of sales the results in net profit. It
means the degree to which a company earns money. Investors also analysis the financial status,
management situation and the growth potential of a company. The profit margin of the company
is 0.506, higher than the industry average level 0.30. The higher profit margin, more investors
willing to invest to the company.
The rate of return on net assets ratio is equal to net profit divided by total assets. It measures
how a company effectively use the assets to earn money. The rate of return on total assets of the
company is 0.315, higher than the industry average 0.21. The higher the ratio, the more
efficiently the company makes money from its assets.
By comparing these two ratios with industry averages, it means the company has high
profitability.
Financial position
Through the comparison and analysis of each ratio, Clean master has better liquidity and
profitability than the industry average. The company has the ability to deal with short-term debt
and long-term debt, and has potential to grow.
Liquidity
The current ratio illustrates the ability to pay current liabilities. After calculation, the current ratio
of the company is 13.209, higher than the industry average of 5.46. This means that the enterprise
has enough current assets to maintain normal business operations and repay short-term debts.
However, if the current ratio is too high, which means the company does not use of its assets to
operate its business reasonable. This situation may affect the company’s future income.
There are two indicators measures the ability to pay long-term debts, debt-to-equity ratio and
debt-to-assets ratio.
Debt-to-equity ratio is equal to the company’s total liabilities divided by the owner’s equity. The
debt-to-equity ratio of the company is 0.061, lower than the industry average of 2.08. From that
we can know that only a small portion of corporate assets are debt-financed. The debt-to-equity
ratio shows whether a company has the ability to earn enough profits to pay its long-term debts.
If the ratio is too high, the company has a high chance of defaulting on its debts or even going
bankrupt. Since the debt-to-equity ratio of this company is lower than the average level of the
industry, banks are willing to lend money to it and investors are also willing to invest in this
company.
Debt-to-assets ratio also shows whether a company has the ability to pay long-term debts. The
debt-to-assets ratio of the company is 0.058, which is lower than the industry average. The higher
the ratio, the less willing investors are to invest in the company. Because debt-to-assets ratio shows
how much of a company’s assets are financed by debt, which shows how the financially stable
degree a company is.
By comparing these two ratios with industry averages, it means the company has the ability to pay
its long-term debt.
Profitability
Two indicators of a company’s profitability are the profit margin and the rate of return on total
assets.
The profit margin measures the percentage of each dollar of sales the results in net profit. It
means the degree to which a company earns money. Investors also analysis the financial status,
management situation and the growth potential of a company. The profit margin of the company
is 0.506, higher than the industry average level 0.30. The higher profit margin, more investors
willing to invest to the company.
The rate of return on net assets ratio is equal to net profit divided by total assets. It measures how
a company effectively use the assets to earn money. The rate of return on total assets of the
company is 0.315, higher than the industry average 0.21. The higher the ratio, the more efficiently
the company makes money from its assets.
By comparing these two ratios with industry averages, it means the company has high profitability.
Financial position
Through the comparison and analysis of each ratio, Clean master has better liquidity and
profitability than the industry average. The company has the ability to deal with short-term debt
and long-term debt, and has potential to grow.
Ratios
Formula
Company Ratio
Industry Average
Current Ratio
Current assets
Current Liabilities
13.209
5.46
Debt-to-equity Ratio Total Liabilities
Total equity
0.061
2.08
Debt-to-assets Ratio Total Liabilities
Total equity
0.058
0.48
Profit Margin
Net profit
Total Revenue
0.506
0.30
Rate of return on
total assets
Net profit
Total assets
0.315
0.21
Cleaning Master
Florey, ACT 2615
02-2828 6868
Trial balance report
Jul 2022
Account no
Account name
Debit ($)
1-1110
Cash Account
$15,154
$35,704
1-1400
Prepaid Insurance
$5,500
$5,500
1-1500
Cleaning Supplies
$250
$1,200
1-1550
Office Supplies
$170
$170
1-2110
Cleaning Equipment at Cost
$0
$4,500
1-2120
Cleaning Equipment Accumulated
Depreciation
1-2210
Furniture & Fixtures at Cost
1-2220
Furniture & Fixtures Accumulated
Depreciation
1-2310
Office Equipment at Cost
1-2320
Office Equipment Accumulated
Depreciation
2-1200
Accounts Payables
2-1350
PAYG Withholding Payable
3-1100
Owner Capital
4-1000
Services Revenue
6-1300
Depreciation Expense
6-1500
Office Supplies Expense
6-3100
Advertising Expense
6-4100
Cleaning Supplies Expense
6-4350
Insurance Expense
6-4400
Rent Expense
6-4500
Telephone Expense
6-4600
Water Expense
6-4700
Electricity Expense
6-5120
Superannuation
6-5130
Wages & Salaries
Grand total
Net profit
YTD Debit ($)
$125
u
Y
$5,000
$52
$0
n
a
$67
$300
,
n
$244
g
n
B
Cleaning Master | Trial balance report | Generated 26 Apr 2023
i
T
&
$4,000
$67
$300
$2,923
$0
$35,000
$34,820
$34,820
$244
$30
$30
$279
$279
$600
$600
$500
$500
$2,100
$2,100
$80
$80
$370
$370
$430
$430
$1,195
$1,195
$11,385
$11,385
$38,287
$52
$2,923
e
h
,C
YTD Credit ($)
$125
$0
e
M
:
y
Credit ($)
$38,287
$17,607
$73,287
$73,287
$17,607
Page 1 of 1
Cleaning Master
Florey, ACT 2615
02-2828 6868
Trial balance report
Jul 2022
Account no
Account name
Debit ($)
1-1110
Cash Account
$15,154
$35,704
1-1400
Prepaid Insurance
$5,500
$5,500
1-1500
Cleaning Supplies
$250
$1,200
1-1550
Office Supplies
$170
$170
1-2110
Cleaning Equipment at Cost
$0
$4,500
1-2120
Cleaning Equipment Accumulated
Depreciation
1-2210
Furniture & Fixtures at Cost
1-2220
Furniture & Fixtures Accumulated
Depreciation
1-2310
Office Equipment at Cost
1-2320
Office Equipment Accumulated
Depreciation
2-1200
Accounts Payables
2-1350
PAYG Withholding Payable
3-1100
Owner Capital
4-1000
Services Revenue
6-1300
Depreciation Expense
6-1500
Office Supplies Expense
6-3100
Advertising Expense
6-4100
Cleaning Supplies Expense
6-4350
Insurance Expense
6-4400
Rent Expense
6-4500
Telephone Expense
6-4600
Water Expense
6-4700
Electricity Expense
6-5120
Superannuation
6-5130
Wages & Salaries
Grand total
Net profit
YTD Debit ($)
$125
u
Y
$5,000
$52
$0
n
a
$67
$300
,
n
$244
g
n
B
Cleaning Master | Trial balance report | Generated 26 Apr 2023
i
T
&
$4,000
$67
$300
$2,923
$0
$35,000
$34,820
$34,820
$244
$30
$30
$279
$279
$600
$600
$500
$500
$2,100
$2,100
$80
$80
$370
$370
$430
$430
$1,195
$1,195
$11,385
$11,385
$38,287
$52
$2,923
e
h
,C
YTD Credit ($)
$125
$0
e
M
:
y
Credit ($)
$38,287
$17,607
$73,287
$73,287
$17,607
Page 1 of 1