FINANCIAL STATEMENT ANALYSIS

ABSTRACT

Just by looking at the numbers we can easily distinguish the similarities and differences of Blake
International and Scott Corporation’s Financial Statements. While it is apparent that Scott
Corporation continues to strive and grow, Blake International at some point seems to have financial
problems. One of the biggest differences between the two is their % change in sales, gross profit,
operating profit and net income over the last five years as shown in the trend analysis.

Let’s have a thorough analysis on the both entities’ financial statements and computation of financial
ratios.

SOLVENCY

Blake International

Being able to compute the liquidity ratios. Blake’s liquidity seems to decrease over time. The current
ratio as well as the quick ratio, continues to decrease every year due to continuous decrease of
current assets and increase in current liabilities. As shown in the balance sheet, the decrease of
receivables and inventories aggregate the ratios to falter and seems to be the entity’s problem. On
the other hand, cash and cash equivalent increases even if current liabilities increase which is a good
thing. Finally, times interest earned ratio also decrease over time which is a bad thing for it is an
indicator that Blakes’ ability may not meet interest payments on its debt and arise to much bigger
problems.

Being able to compute the turnover ratios, Blake is having a good run being able to make receivables
turnover and accounts payable constant over time. It aggregates the constant ratio of days receivable
and days payable. Blake also increases its inventory turnover which is a good thing. Hence, it
effectively affects the cash conversion cycle of Blake’s.

Scott Corporation

Scott’s liquidity seems to increase over time compare to Blake. Even though both Scott’s current
assets and current liabilities increases the difference over them is apparent on which enable Scott’s
current and quick ratio to rise. Unlike Blake, Scott’s cash ratio seems to decrease due to increase of
the current liabilities while the conversion of cash can’t keep up.

Scott’s liquidity seems to increase over time compare to Blake. Even though both Scott’s current
assets and current liabilities increases the difference over them is apparent on which enable Scott’s
current and quick ratio to rise. Unlike Blake, Scott’s cash ratio seems to decrease due to increase of
the current liabilities while the conversion of cash can’t keep up. Lastly, both entities seem to fall
short when computing the times interest earned ratio. It is because as Scott’s operating income
increases, interest expense increases even more but it also apparent that the 2003 report of Scott in
terms of TIE is returning to turn good.
OPERATING PERFORMANCE
Both entities’ operating efficiency ratios are relatively constant, it just shows how they managed to
constantly utilize their assets to generate sales.

In terms of operating profitability ratios, both entities’ gross profit remains constant over time but
as their expenses, depreciation and taxes increase, operating profit and net income decrease. But if
we are talking of which entity has suffered, it is Blake. When looking at the trend analysis provided,
it is very apparent of a huge downside of net income, decreasing a massive 93.33% in the past 4 years
while its operating income also decreased a great percentage of 61.81%. Scott on the other hand is
not much affected with the slightly decrease in profitability ratios. In fact, its sales increased by
84.35%, its gross profit by 78.11%, its operating profit by 26.63% and its net income by 12.75%.

RISK ANALYSIS

Blake International

Blake’s operating, financial, and total leverage decreases over time due to massive change in
operating and net income. It is also because of the usage of net fixed assets for it has accumulated
depreciation which increased by 6.9%. Hence, it increased the depreciation expense while operating
income decrease. With these leverage ratios, Blake seems to have lower profits or experience loss
rather than taking a profit which is actually shown in the trend analysis.

On the other hand, Blake’s debt ratio increases due to the increase in liabilities while assets decrease
over time. It had surpassed the 0.5 debt ratio mark in 2000 computing a debt ratio percentage of 79%
but is now currently slowing to decrease at 66% as of 2003 which is a good thing but it is sill over-
leverage and may lose its ability to pay interest as times earned ratio shows.

Even debt to equity ratio and interest coverage had increased over time, it’s because of the huge
amount of debt and interest expense that increase every year. Hence, as these leverage ratios
increases, Blake may unable to generate sufficient cash flows from its core operations and may
unable to pay interest on their debt.

Scott Corporation

Similar to Blake, Scott’s operating, financial, and total leverage decreases over time. Also, it is because
of the increase of depreciation expense from net fixed assets. But unlike Blake that have a massive
decreased in debt ratios, Scott slightly decreased his and maintained lower at the 0.5 debt ratio mark.
It just shows how Scott successively financing its growth with the same proportion of debt over the
last five years. However, Scott does need to be aware that the times of interest earned is trending
down.