Illustration of a Basic Financial Analysis of a Business
As seen from the table above, Adam Wesley is very liquid, enjoying a high liquidity ratio of 16. This is augers well for the future.
The Gross Profit margin on sales is also attractive. A 35% profit margin on sales signals that Adam Wesley should recoup his investment and then some.
The Current Ratio may be a bit too high, suggesting that some of the cash or bank can be invested rather than resting in the bank or remaining as cash in hand. Cash or bank is best held in such amounts as will be needed to fund the daily working of the business and no more. On a positive note, it is better to have this ratio too high, as all Adam Wesley needs to do to regularize this, is to invest some of the extra liquidity. If the converse is the case, the business may have to take a loan or risk running into overdraft.
Notwithstanding the positive return on investment at the end of the day, the investor must, however, look at the rate of return they desire on their investment because ultimately it makes little sense to operate a business to achieve a rate of return which is lower than could have been obtained had the money been invested in a money market instrument, for instance.