Sample of a Memo

Frozen Fractals Corp Memo

To:

From:

RE: Analysis Memo of Frozen Fractals Corp Financial Position

The subject above refers,

  • The analysis of the Frozen Fractals Corp financial position is based on the financial statements and ratio computed. The analysis used income statement; balance sheet and shareholders’ equity statement to deduce the company position (Delen, Kuzey, & Uyar, 2013). Through the use of the mentioned statements, the following ratios were computed using the excel formula; current ratio, quick ratio, debt ratio, equity ratio, debt to equity ratio, and profit margin.
  • The company is financially strong based on the quick ratio and current ratio which stand at 61000.68 and 16.683 respectively. Noting that both ratios are above 1, it shows the company is in a sound financial position. In computing the current ratio the current assets were dividends with current liabilities. Thus, the ratio indicates the ability of the company to finance its operations without current debts since for every value of the assets the debt account for 1/16 (Lewellen, 2004). This indicates that the company assets are not tied to debts or cannot be sold to meet any outstanding financial obligations. The quick ratio shows how easily the company can generate liquid cash from the trading activities even with inventories in store. The ratio was arrived at after deducting inventories from current assets and dividing the solution by current liabilities.
  • Frozen Fractals Corp has more assets than liabilities. This is indicated by the current ratio that shows that for every value of liability, the company has, it has an equal proportion of assets that stands at 16.6 times. A look at the financial statements shows the liabilities standing at $ 6,000 while assets standing at $ 100,000.
  • Frozen Fractals Corp is a business that is generating profit based on the profit margin ratio that stands at 1.96 to 1. The profit margin was arrived at after dividing the net profit with sales revenue. Therefore, based on the profit margin ratio the company’s profit is higher than the net revenue registering higher profits (Delen, Kuzey, & Uyar, 2013).
  • As a prudent investor, I will invest in the company since it is financially sound. A look at the debt ratio that stands at 0.05994 shows that only 5% of the company’s operation is financed by debt in comparison to the shareholder’s equity. Thus, the company has zero chance of becoming insolvent (Lewellen, 2004). The fact is further amplified by a debt-equity ratio of 0. Moreover, the fact that the company’s assets have reflected a strong standing against the liabilities as shown from the current ratio and quick ratio is a reason to make me invest in the company. Also, the company is profitable as indicated by the profit margin of 1.96 making it a worthy investment.
  • However, the owner of the business should consider expanding investment in other areas of operations so that the current ratio or quick ratio should become lower than the calculated ones. The ideal ratio for both should be close to one. This will eliminate the misuse of the cash flow in the business as it lies idle (Lewellen, 2004). From the financial statements, the cash stands at $ 61,000. This has the potential of misuse should the owner decide to hire a specialist to run the business on her behalf or she may be tempted to withdraw more to finance things that are outside the business.

References

Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert systems with applications40(10), 3970-3983.

Lewellen, J. (2004). Predicting returns with financial ratios. Journal of Financial Economics74(2), 209-235.

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