Financial Ratio Analysis - Harry 's Hamster Limited
Financial statements are useful as they can be used to predict future indicators for a firm using the financial ratio analysis. From an investor 's perspective financial statement analysis aims at predicting the future profitability and viability of a company, while from the management 's point of view the ratio analysis is important as it helps anticipate the future conditions in which the firm should expect to operate and facilitates strategic decision making (Brigham and Houston 2007, p. 77).
Harry 's Hamsters Limited (HHL) experienced growth in its profitability from 2007 to 2008; however, the net income reduced significantly during 2009. The return on equity (ROE)…show more content… However, the quick ratio for the company reveals serious concerns as it has decreased from 1.67 in 2008 to 0.22 in 2009. The low quick ratio implies that a considerable portion of the current assets of the company are tied up as part of its inventory (Bragg 2007, pp. 14-16). This could also mean that HHL might be unable to sell the hamsters and sales might be suffering. The company must increase its working capital to meet its near term current liabilities and retain its solvency (Brigham and Houston 2007, pp.…show more content… The company performed exceptionally well during 2008, which led to an increase in its debt facility from £ 0.275 million to £ 0.45 million recently. The recent financial results revealed a tightening credit position of the company during 2009, which led to concerns regarding the excess usage of the overdraft facility by the company. Recent communication with the company reveals that it is facing liquidity problems due to its ambitious expansion program; however, the problem can be solved depending on the ability of the management to realise the seriousness of the situation (Madura 2006, pp.