Analyzing financial statements using ratio analysis: Case of Mehasa Consulting

Year after year, companies provide financial statements to analyze the overall performance of a firm in its financial status. Balance sheets and income statements form most of these statements that paint an accurate picture of a firm’s financial condition. However, interpreting the raw figures in many such statements is sometimes tough for various stakeholders. Financial ratio analysis does just that-to make hard data easier to read and understand. Financial ratio analysis can prove to be a potent tool for companies like Mehasa Consulting, which would find it relatively easy to operate in a dynamic consulting environment.
What Is Financial Ratio Analysis?
It requires the use of key ratios which may be derived from a balance sheet and income statement. This form of analysis therefore allows the profitability, efficiency, liquidity, and structure of a firm to be appraised in a more palatable way as raw data is transformed into ratios.
For Mehasa Consulting, this kind of analysis would be very crucial for knowing how well it manages resources, executes strategies, and enjoys financial flexibility. Long term success in a competitive industry like consulting requires keeping in step financially agile, basing decisions on data-driven analysis.

Why do We Use Financial Ratios?

1. Simplification in the Interpretation of Financial Data
The most important thing about ratio analysis is that it makes what would otherwise seem complex, like financial statements in an unfamiliar manner, easy to compare through a simplified metric. For example, Mehasa Consulting can now easily determine its profitability ratios – it would no longer have to find a way to break every single line in the income statement to understand how profit was generated from revenue.

2. Identification of potential threats and opportunities
Financial ratios allow warning signals that might detect threats or opportunities that are not spotted through raw financial statements. Close monitoring of the current ratio and debt-to-equity ratio at Mehasa Consulting would help to identify liquidation problems or an overreliance on debt, enabling management to take preventive action to cut the risk in advance.
3. Comparison with Competitors
Ratios allow companies to be able to compare their performances relative to peers or industry standards. The business, here being Mehasa Consulting, will be able to realize where they stand in relation to others, and areas of improvement thus rise. It could even make a comparison of the gross profit margin or return on assets with that of a peer within the consulting sphere and how efficient and profitable it was as compared to the rest.

Main Classifications of Financial Ratios
Financial ratio analysis can be categorized into various categories from which different aspects of operations are understood. Such categorizations are relevant for Mehasa Consulting in providing a comprehensive view of financial performance.

1. Profitability Ratios
Profits ratios are a measure for establishing that a company is able to generate earnings in relation to sales, assets, and equity. For Mehasa Consulting, profitability is thus paramount in sustaining business operations that ultimately add value to its various stakeholders.
Gross Profit Ratio:
This ratio measures how the company is producing its service in relation to the costs used in production.

Formula:
Gross Profit Ratio
=
Gross Profit
Total Revenue
×
100
Gross Profit Ratio=
Total Revenue
Gross Profit
​​
​ ×100
A high gross profit ratio means that the company’s service costs are sufficiently less than the sales price, which is very crucial for maintaining a profitable consulting enterprise.
Return on Assets (ROA): This is a ratio used to identify how efficiently Mehasa Consulting is making use of its assets in order to provide profit.

Formula
ROA
=
Net Income
Total Assets
×
100
ROA=
Total Assets
Net Income
​​
​ ×100

The more significant the ROA, the more efficiently a company utilizes its resources in order to gain income. This is most crucial for a consulting firm wishing to maximize the usage of intellectual capital and other assets.
Efficiency Ratios 2.
Efficiency ratios tell the extent of how a firm is generating profitability by the effective utilization of assets and liabilities. A consulting business must ensure efficient use of time and talent as well as other resources in extracting the highest benefit from the profit.

Receivables Turnover: This ratio calculates the speed at which a firm collects payment from its clients. For Mehasa Consulting, it is of utmost importance that it must maintain an impressive receivables turnover ratio to be able to ensure smooth cash flow stability and prevent delay in funding operations.

Asset Turnover Ratio: This measures how effectively the firm can utilize its resources to create sales. Although value of intellectual property is at times tangible, most firms’ resources are comprised of their human capital. That would be huge for consulting firms.

3. Liquidity Ratios
Liquidity ratios measure a firm’s ability to meet short-term obligations by employing its most liquid assets. It is particularly useful to Mehasa Consulting in the event that client payments are made at odd times or on cycles of a project.

Current Ratio: This measures how well a company can service short-term liabilities by employing its current assets.
Mathematically
Current Ratio
=Current Assets Current Liabilities
Current Ratio= Current Liabilities /Current Assets
​​
The best current ratio usually held at 2:1, which is nothing but having the twice the number of the current asset as the company executes its liability. Then Mehasa Consulting is assured that it does not have a short liquidity situation in meeting the day-to-day operation.
Quick Ratio : It is the relatively stricter type of liquidity measurement. Inventories and other non liquid able assets are omitted here.
Formula;
Quick Ratio
=
Quick Assets
Current Liabilities
Quick Ratio=
Current Liabilities
Quick Assets
​

A ratio of 1:1 or more would indicate that Mehasa Consulting was in a comfortable position to settle its short-term obligations without having to liquidate some of its assets.
4. Leverage Ratios
Levers of leverage measure the amount at which a business relies on debt in funding operations. For Mehasa Consulting, which is a service company, it will, therefore, focus on the proper control of debt because a higher level of leverage might lead to financial risk.

Debt-to-Equity Ratio
This ratio measures the total liabilities of the company against its shareholder equity, which gives an idea of the level of debt that is used to finance the assets of the company.
Formula:
Debt-to-Equity Ratio
=
Total Liabilities
Shareholders’ Equity
Debt-to-Equity Ratio=
Shareholders’ Equity
Total Liabilities
​
Less than 1 is good for Mehasa Consulting as it will decrease the risk of financial risk and increase the stability of finance.
Use of Ratio Analysis for Mehasa Consulting
Mehasa Consulting’s management will find the significant financial ratios-profitability ratios, liquidity ratios, and leverage ratios-governing the use of its resources, pricing strategy, and new investment in projects. Tracking them with accuracy helps ensure Mehasa Consulting is always competitive, profitable, and financially sound in this ever-changing market.

Financial ratio analysis enables Mehasa Consulting to identify weaknesses and alter its approach accordingly as well as track progress yearly. All these financial ratios-profitability, asset efficiency, or managing the level of debt-are quantification of strategy and maintain long-term performance.
One of the most basic tools a business like Mehasa Consulting needs to retain clear knowledge of its financial performance is financial ratio analysis. The focus on key ratios such as profitability, liquidity, and leverage enables the company to track its health in effective ways, predict problems ahead, and take advantage of available opportunities. Rising competition in the consulting sector necessitates that Mehasa Consulting make use of such insight to maintain its lead.