Part 1 - Income Statement Rational

Income statement indicates the profitability position of an entity which includes revenue and expenses. Generally, investors think about the profitability of an entity while making an investment. The investors should analyze the vertical and horizontal analysis of income statement. Vertical and horizontal analysis of income statement helps to make trend analysis of revenue and expenses during the period as well as of prior period. The analysis of income statement indicates the expense percentage of sales. ("Horizontal or Trend Analysis of Financial Statements - Explanation and Example | Accounting for Management", 2020)

In the given case, it is analyzed from the past 5 year’s income statements that:

Net sales has been increased by Approximately 29% every year
The gross profit margin is calculated by taking division of gross profit and net sales. Increase in gross profit margin indicates the better financial performance. In the given case, the gross profit margin of the company is 79% during each year. It indicates that even increase in net sales by 29%, the gross profit remains constant.
The net profit margin is calculated by taking division of net profit and sales. It is observed that there is increasing trend in net profitability of the company which indicates the positive interest of investor; the company is incurring losses over the period of 5 years. However, increase in trend of profitability margin shows that the losses of the company have been reduced by from -248% of sales to 55% of net sales.
It is however observed that the net profit margin has been increased due to reduction in salary and wages by huge percentage.

Part 2 – Balance Sheet Rational

The Balance sheet is commonly known as financial position of the company. It indicates the worth of business at the end of the financial year. Balance sheet includes assets and liabilities of the company. Asset is equals to sum of liabilities and equity. The strength and weakness of financial position can be analyzed through ratio analysis. Ratio Analysis. (2020).

Current ratio – can be calculated by taking division of current assets by current liabilities. It has to determine whether the company has enough current assets to pay the liabilities to be paid within a year. Increase in current ratio means company has sufficient funds to pay short term obligations. In the instant case, the working capital of the company is negative during the five years and it is also observed that the trend of working capital is increasing with negative figures which indicate bad performance.
Return on assets– it helps to understand whether the company is able to generate sales by utilizing the company’s assets to earn profit. Increase in trends indicates better financial position. In the given case, Return on Assets during 2020 is 56% and such return has been reduced to 16% in 2024. Hence, it can be said that the company is not able to generate profitability of the company as required.
Return on Investments – increase in return on investments will help to attract investors. In the instant case, this ratio has been decreased from 53% to 16% during 5 years.

On the basis of above analysis, it is concluded that it is not better to make investments in this company as this company is not performing well. Further, all the ratios indicate negative impacts on financial position of the company.

Part 3 – Cash Flow Rational

Cash Flow Rational – in additions to income statement and balance sheet, cash flow statement also forms part of financial statements. Cash Flow Statement is prepared by making division in three parts – firstly cash flow from operating activities, secondly cash flow from investing activities and thirdly cash flow from financial activities. Cash Flow from operating activities indicates changes in the working capital of the company and additions of non-cash items to net profit of the company. Cash flow from investing activities indicates change in cash flow due to sale or purchase of assets. Cash flow from financial activities indicates that changes in cash flow due to repayment or borrowings of loans, issue of shares, redemption of shares. Fundera.(2020).

In the given case, the company ending cash flow of each year is negative. It seems that the company is facing cash problems, the company’s cash flow at the end of 2020 is negative by $ 811951 and such negative figure has been increased to $ 3598338 in 2024. Accordingly, it is facing cash crunch over the entire period of five years. Further cash turnover of the company has been reduced to -28% from -50%. Hence it can be said that the company have liquidity problems.

It is suggested that the company can increase cash not by making capital purchase during the period of cash crunch, raise an invoice and insist for payment from customers, make delay in payment to suppliers. 9 Ways To Overcome A Cash Flow Crunch - PMG Finance. (2020)

Reference for Fresh Crystal Water Analysis

Fundera. (2020). Retrieved 5 June 2020, from https://www.fundera.com/blog/the-ultimate-guide-to-cash-flow-analysis#:~:text=Cash%20flow%20analysis%20is%20a,have%20at%20any%20given%20time.

Horizontal or Trend Analysis of Financial Statements - Explanation and Example | Accounting for Management. (2020). Retrieved 5 June 2020, from https://www.accountingformanagement.org/horizontal-analysis-of-financial-statements/

Ratio Analysis. (2020). Retrieved 5 June 2020, from https://www.investopedia.com/terms/r/ratioanalysis.asp#:~:text=Ratio%20analysis%20is%20a%20quantitative,cornerstone%20of%20fundamental%20equity%20analysis.

9 Ways To Overcome A Cash Flow Crunch - PMG Finance. (2020). Retrieved 5 June 2020, from https://pmgfinance.com.au/2019/10/17/9-ways-to-overcome-a-cash-flow-crunch/

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