Analyzing financial statement is paramount in ensuring that a company’s financial success can be projected. In this regard, this essay seeks to analyze the annual financial report for Scholastic for the fiscal year 2016/2017 by critically examining its income statement, liabilities as well as the working capital. The paper will also examine Scholastic’s liquidity ratio especially the current ratio and the debt to equity ratio. The sources of revenue and the Organization’s balance sheet will also be keenly analyzed.
Part A
The name of the Organization is Scholastic, and the source URL for the Organization's annual report is http://investor.scholastic.com/static-files/2bd5b15a-fd77-42e9-90e1-208596e7f89e
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With information on the Organization's financial data.
The chief sources of income for Scholastic include book publishing and distribution of children books. Another source is sales of Dav Pilkey’s Dog Man and Captain Underpants Series.
The breakdown of each revenue source as a percentage of total income is calculated below
Children’s Book Publishing and Distribution
$1,052.1/$1,741.6*100= 60.4% of financial year ending 2017 revenues.
Education
$312.7/ $1,741.6 *100= 18% of the fiscal year ending 2017 revenues.
The International revenues from distribution and publication of Organization products and services outside the United States of America.
$376.8/ $1,741.6*100= 21.6% of the fiscal 2017 revenues.
Shepherd (2015), defined cost as the opportunity foregone in the production and distribution of a good or service. Scholastic incurs several costs in the acquisition and development of Content for its product offerings. Costs are usually deferred and acknowledged as Scholastic generates revenues acquired from the costs incurred. The costs incurred include the following;
Republication costs, which include costs incurred by the Organization in the creation and development of the art, prepress, editorial, digital conversion as well as other content necessary for the production of the book's master copy and other media.
Royalty advances is another cost incurred in all of Scholastic's reportable segment, but the costs are most prevalent in section undertaking Children's books publishing and Distribution. Royalty advances come about when authors are provided with advances against the speculated future royalty payments.
Acquired intangible assets acquired by the Organization from third parties via acquisitions of entities.
Part B
Scholastic’s Balance Sheet
The Organization's balance sheet provides a statement of financial data entailing the assets, liabilities, and capital for the fiscal year 2107. A balance sheet also details the balances of organization's income and expenditures over the previous financial year ( White, Sondh & Fried, 2016 ). In fiscal 2017, the organization's cash and cash equivalents were declared at $441 recording increase from $399.7 in the previous fiscal year. A short-term investment is a form of an investment fund, which invests in the money markets investments of high and low risk. Short-term investments are used by organizations to store funds while preparing for the transfer of the funds to another form of investment with higher returns. Scholastic has $1,307 in the form of stockholder's equity.
Cash refers to the most liquid current assets found in an organization’s balance sheet ( Shepherd, 2015 ). Current liabilities in an organization's balance sheet include short-term debts, accounts payable and accrued liabilities. The organization's current liabilities include total debts reported at $6.2, long-term capital lease obligations reported at $6.5. Also, the total capital lease obligations were reported at $7.6 for fiscal 2017. Scholastic has no long-term debt for the 2017/2018 financial year.
The organization has enough cash reserves to meet its short-term debts when they fall due since the cash and cash equivalents reported at $444.1 exceed the organization's current liabilities. The current liabilities are settled by the use of current assets especially cash, which Scholastic has. An organization's working capital refers to the standard measure of a company's liquidity, efficiency, and overall health. Working capital includes the organization's cash, inventory as well as account receivables ( Bhattacharya, 2014).
Scholastic’s Working Capital = Current Assets- Current Liabilities
= $444.1- (6.2+7.6) = 430.3
Working Capital= 430.3
Current ratio refers to a liquidity ratio that measures the organization's ability to meet its short and long-term debt obligations when they fall due. Scholastics current ratio is calculated as shown below;
Current Ratio= Current Assets/ Current Liabilities
= $444.1/13.8= 3.21
The organization’s current ratio is 3.21, and this means that the Organization has $3.21 of current assets for every $1 of the organization's current liabilities. The current ratio of 3.2 means that the Organization is healthy and this implies that it has no problem meeting its short-term obligations.
Potential creditors use the organization’s current ratio to measure its ability to pay off short-term debts when they fall due. The current ratio is, therefore, a measure of the company's short-term liquidity.
Debt to equity ratio indicates the proportion of equity and debt an Organization is using towards financing its assets as well as the extent to which its shareholder’s equity can meet financial obligations to the creditors in case of organizational decline ( Heikal, Khaddafi, & Ummah, 2014 ).
Scholastic’s debt to equity ratio is calculated as shown below;
Debt to Equity ratio= Total liabilities/ Total shareholder’s equity
= Total liabilities= total debt+ long-term capital lease obligations + total capital lease obligations= $6.2+$6.5+$76= 88.7
Total liabilities= $88.7
Debt to equity ratio= $88.7/ $1,307.9 = 6.78
Scholastic’s Debt to Equity Ratio is 6.78
The result means that Scholastic had $6.78 debt for every dollar of equity. On its own, the debt to equity ratio does not give current investors a clear picture, and it is, therefore, important to compare the ratio to that of other companies. Debt to equity ratio helps potential investors identify organizations that are highly leveraged and that may pose higher financial risks when they make investment decisions ( Heikal, Khaddafi & Ummah, 2014 ).
In conclusion, financial analysis is a significant activity that companies should embrace. It allows the Organization to assess whether it is stable, solvent, liquid or even profitable enough to justify a monetary investment. Assessment of the organization's viability, stability, and profitability is essential for decision-making purposes as it results in proper resource allocation.
References
Bhattacharya, H. (2014). Working capital management: Strategies and techniques . PHI Learning Pvt. Ltd.
Heikal, M., Khaddafi, M., & Ummah, A. (2014). Return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR). International Journal of Academic Research in Business .
Shepherd, R. W. (2015). Theory of cost (Vol. 2951). Princeton University Press.
White, G. L., Sondh, A. C., & Fried, D. (2016). Analysis of Financial Statements. Analysis .
