Financial Analysis the Current Ratios Term Paper

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In the case of Arctic, the company is relying, in terms of long-term financing, almost exclusively on retained earnings. Retained earnings can be defined as earnings that are "retained by the company to be reinvested in its core business or to pay debt," basically, a form of not paying out dividend to the shareholders and reinvesting profit. Retained earnings amount for 65.1% of total asset value, a similar proportion as the one in 2003.

Retained earnings play the same role at Polaris as well. In 2004, these amounted up to 46.2% of total asset value. On the Polaris 2004 balance sheet, on the other hand, the retained earnings are accounted for as shareholders' equity.

As a conclusion in terms of debt usage, both companies use no or almost no long-term bank debts to finance their activity and there is no financial leverage worth analyzing. In both cases, the shareholders' equity (processed as retained earnings) amount to 40-50% of the total liabilities value.

We will be using three ratios to assess the companies' profitability: the gross profit margin ratio, the return on assets ratio and the return on equity ratio.

The gross profit margin ratio is calculated as (Sales - Cost of Goods Sold)/Sales and is perhaps the best measure of the company's profitability in terms of sales.

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At Arctic, the gross profit margin was 21.4% in 2004, with 22.3% in 2003 (a slight decrease here). At Polaris, the gross profit margin was 23.9% in 2004 and 23.4% in 2003. As we can see from the above figures, the gross profit margins are comparative for the two companies and variations are minimal to the precedent year.

The return on assets is calculated by dividing net income by the total assets value. The return on assets was 13.1% in 2004 for Polaris, with 16.5% in 2003. We can observe a 3.4% difference in the return on assets here and this can be explained by noticing that the total assets value increased with over 18%, while the net income actually decreased in value. This means that the newly acquired assets have not yet begun to generate income from their activity.

At Arctic, the return on assets was 10.6% in 2004 and 11.8% in 2003. The slight decrease in Arctic's return on assets value can bear the same explanation as in Polaris's case: net income decreased, while the total assets value has actually increased over this period.

The return on equity value will actually measure the amount of profitability that the shareholder obtains from the.....

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