Download Running head: UNIT I ESSAY and more Lecture notes Accounting in PDF only on Docsity! Running head: UNIT I ESSAY MBA 6081 Unit I Essay: Financial Ratio Analysis Columbia Southern University MBA 6081 - Corporate Finance GoPro: Financial Ratio Analysis Nick Woodman was an avid outdoorsman who enjoyed surfing, skiing and motorsports, but couldn’t find a camera that met his documentary needs. So, in 2002, he did what any entrepreneurial American would do; he founded his own company. [ CITATION GoP20 \l 1033 ] His company, GoPro, manufactures action cameras and an ecosystem of mounting hardware and wearable accessories. Products are available via retailers and the GoPro home page. [ CITATION Mer21 \l 1033 ] GoPro’s third quarter 2020 report documented expanding revenue from sales and growth in cloud-based storage subscriptions. [ CITATION GoP201 \l 1033 ] While these upturning sales trends are good, investors want to know if there is potential for sustained growth and, if so, what is the plan? The following ratios document a company funding growth with ever increasing debt, assets becoming less liquid and earnings per share steadily trending downward. The full 2020 financial report has yet to be published, but the expanding post COVID-19 lockdown boom must surely be around the corner. Financial ratio information The purpose of financial ratios are to extract pertinent data from corporate financial statements and translate them into numerical values. Trendlines and documented results are compared against industry standard, enabling investors and stakeholders to understand the financial performance of a company.[ CITATION Mer21 \l 1033 ] This essay will use 7 ratios to assess GoPro’s debt, liquidity, profitability and past earnings. Debt-to-equity The debt-to-equity ratio is one way to determine if a company has borrowed too much. In table 1, the data shows GoPro (since 2015) demonstrating an increasing reliance on debt to fund its growth. An alarming jump occurred in 2018 and again in 2019; the debt-to-equity ratio exceeded 2.0 indicating that two-thirds of its financing derived from debt, with the other third from shareholder equity. Current ratio GoPro’s current ratio of 0.46 means that the company has nearly twice as much debt as it does current assets. The bottom line is that if debtors call the debt, GoPro can’t readily pay. If the ratio were 1.0 (or higher), they could break even. The closest they got was back in 2015, with a 0.95. This trend is not a harbinger of prosperity. Return on equity Shareholders want to know if their investment is profitable. The return on equity ratio is that performance measure. The higher the number, the better. GoPro’s downward trend didn’t stop at zero; they ventured into the negatives. Quick ratio While the current ratio and quick ratio measure short-term liquidity, the quick ratio is more pessimistic because it subtracts inventories from current assets. This may not be beneficial for GoPro because of their potential to quickly move inventory. A critical assumption is that common stock is a large portion of their current assets, and thus minimizing the effect of fluctuating inventory levels. Working capital ratio The working capital ratio represents a company’s ability to pay its current liabilities using its current assets.[ CITATION Bra20 \l 1033 ] The crux here is that current liabilities
