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Speedster Athletic Company Financial Analysis

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Analysis of Speedster Athletics Company’s 2011 financial statements has identified a stable current financial situation and profit potential, but has raised concerns regarding long term solvency and operating efficiency. Ratio analysis and industry comparison of solvency, profitability and activity revealed the following: Solvency Speedster Athletic Company’s 2011 current liabilities ratio improved from the previous year, including a $59,000 decrease in the line of credit. Overall the company’s current ratio is above industry average which indicates that operations are generating enough revenue to cover normal operational expenses. However, the company’s long term debt increased significantly during the same period. Speedster Athletics Company’s debt to owner’s equity ratio revealed that creditors currently have a larger stake in the company’s assets than do shareholders. In addition, the company’s debt ratio has been increasing over the past three years and now stands at 57.0%, which is more than double the industry average of 24.5%. This reliance on borrowed funds will increase debt repayment and interest expenses. …show more content…

Considering the minimal change in total shareholder equity, the difference indicates a decrease in net income. On the other hand, Speedster Athletics Company’s gross margin ratio has remained consistently above the industry average over the past three years. Gross margin on sales reflects the portion of total sales revenue remaining after variable costs of goods sold which can be applied to fixed expenses. Although the company’s high gross margin ratio of 57% is more double the industry average, Speedsters Athletics return on sales ratio is only 0.6%. The difference between these two ratios indicates high overhead expenses and identifies overhead expenses as an area of

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This means that a huge part of the company's assets is financed by debt. While this level of debt may increase the company's financial risk, it may also enable the company to finance growth opportunities and generate higher returns for shareholders (Délèze & Korkeamäki, 2018). In terms of the solvency position of the company, it is essential to observe that the Debt Ratio is just one of many financial ratios that should be considered. The solvency position of the company should be assessed based on a range of factors, including its ability to generate cash flow, its profitability, and the level of interest payments on its debt (Rugy & Salmon, 2022).

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