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Analysis of Competition Bikes Inc - Term Paper Example

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Analysis of Competition Bikes Inc

Income Statement is one of the fundamental financial statement that provides results of revenues, earnings, and EPS (Earning Per Share). The income statement provides a consolidated view of the revenue a company earned, the expenses it incurred and its effect on the bottom line, i.e. the profit during a certain period of time. It is a mirror to the investors reflecting on company performance and its potential to perform. Essentially a company should be earning more than it is spending and thus signal profit earning opportunity to the investors. The horizontal analysis of the Income Statement of Competition Bikes Inc. would compare the performance of the company during the year 2006-2008. The following is a snapshot of the Income Statement of company during 2006-2008 along with its horizontal analysis. We have compared the Income Statement of 2007 keeping 2006 as the base year and then analyzed the performance of 2008 keeping 2007 as the year of reference. Horizontal Analysis of Income Statement 2006-2007 As we have mentioned earlier, there are two major sections of an Income Statement: Revenue, Expenses, and Profit. Revenue minus the expenses is the profit and we would look at the company’s change in revenue and overall expenses during the period of 2006-2008. As it is evident from the horizontal analysis of 2007 with 2006 as the base year, revenues have increased by 37.5% during the year 2006-2007 due to the increase in Net Sales by 33.3%, which shows that the company is strong in its area of operation. The Cost of Goods Sold also increased by 31.8%, which is very close to the percentage change of Sales during the year, thus indicating that it is not a negative sign. It is a concern for the company even if the profits are high when the increase in Cost of Goods Sold is not relative to the increase in Sales. A definite weakness for any company is its increasing expenses, specifically administrative expenses. The Selling expenses also increased during the year by 33% including the expense on advertising that increased by 37% and administrative expenses increased by 20.4%. A major chunk of the administrative expense is the expenditure on Research and Developed which increased by 37.5%. The company believes in bringing a superior product to the market that has quality as well as first movers advantage with it, and it provides the company a strong selling potential. Thus, the overall increase in the expenses was by 24%, which is not a positive sign for any company, specifically increment in administrative expenses exhibit operational inefficiencies as the company cannot justify the expenses with any particular expansion project. However, a more clear idea of selling and administrative expenses as compared to the sales would be evident in the vertical analysis of the company. The operating income of the company, which is the revenue minus expenses increased by 154.6% and the overall profit before income tax and the Net Earnings increased by more than 300% showing abnormal but phenomenal growth. A horizontal analysis of year 2007 keeping 2006 as the base year reveals positive growth for the company in terms of Sales and the overall Net Earnings that shows that Competition Bikes Inc. is moving in the right direction and growing. The major strengths of the company lies in the increase in S ...Show more

Summary

Analysis of Competition Bikes Inc. Analysis of Financial Statements Type your name here 8/30/2011 Horizontal Analysis of Competition Bikes Inc. The horizontal analysis of fundamental financial statements means comparing the financial data of a company for two or more years and it is termed as horizontal analysis because the analyst compares the current item on the statement with the corresponding item on the previous year’s statement…
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