MODULE 3: Analytical Case Study on TechGrowth Inc

Ifeoluwa Gbadewole

Master of Business Administration

Nexford University

ACC 6050: ACCOUNTING AND FINANCIAL REPORTING

Dr Damian Dunbar
 Review of Tech Growth INC Financial Statements

Tech Growth has shown a steady increase in revenue. This has been because of their reduced

expenses, and increased sales revenue. Within the time specified they have also experienced an

increase in tax expenses.

The business has experienced a significant growth as they have purchased more fixed assets and

due to the increase in sales Tech growth has been able to increase their inventory size, acquire

more cash and are able to make a lot of sales on credit leading to an increase in their receivables.

Their current liabilities are increasing, which implies that they take short-term loans and short-

term credit purchases to be able to add to their inventory, making them have an increasing

current liability over the years. There is also a reduction in their long-term liabilities and an

increase in retained earnings due to the profit increase.

There is an increase in cashflow from operating activities and investing activities. There is also

an increase in cash flow from their financing activities, this is because of the repayment of their

long-term liabilities and issuance of common stock that is done every year.

Generally, Tech Growth's financials are very encouraging except for a few items that may cause

some issue in the future if not effectively managed. For instance, their short-term debts are

increasing, and their long-term debts are reducing. This might be because of them taking short

term loans to acquire non-current assets and this is not advisable as short-term loans are more

expensive. Also, the increase in account payables might either be because of having a good

relationship with their vendors and suppliers or they take too long to pay them. If this is the case,
then this does not do well for the reputation of the business. The company needs to increase its

working capital, and it should be maintained at an optimum level.

Financial Analysis

Horizontal Analysis:

The tables below show the horizontal analysis of the Balance sheet, Income statement and Cash

Flow statement.
There is 47% increase in cash assets of the business between 2022 and 2023 and this is because

of the improvement in Net income from the sales they made during the year. However, the

increase in 2024 was not as high as that of 2023 with a 30% improvement.

Their current liabilities have increased by 25% in 2023 while compared to 2022 and a 20%

increase in 2024 when compared to 2023. There is also a reduction in their long-term liabilities

overtime with a 12.5% reduction in 2023 and 14.29% in 2024. Tech Growth seems to be

financing their long-term investments with short-term loans. Retained earnings have increased

from $45,000 in 2022 to $80,000 in 2023 showing a 77.78% increase and a 45.5% increase in

2024 when compared to 2023. We can deduce that the company does not declare dividends.

We have observed a progressive growth in revenue in 2023 and 2024 to the tune of 13.64% and

12% respectively. This increase is achieved from core business operations only. The interest

expense has been gradually reducing by 16.67% in 2023 and 20% in 2024 which is because of

their long-term loans that they have been paying.

growing. In 2023 there is a 10.81% increase in operating cash flow while in 2024 there is a

12.20% increase due to the increasing operating activities of the business. The company has been

issuing shares and paying back their long-term loans, possibly to improve their Gearing ratio.

Vertical Analysis

There has been a steady increase in cash as current assets in the past 3 years and this can be used

for other economic purposes. The decision to include it as a current asset is not encouraging. The

changes in non-current assets are too little compared to the percentage growth that the business

has experienced at the same time.

During the period of 2022-2024 the current liabilities and total liabilities have gradually

increased, and this is because of loans taken and other increased expenses. However, the long-

term liabilities have been decreasing over this same period and this indicates that the company
might be taking short term loans to pay off their long-term loans and this is not a good financial

decision as it is not sustainable on the long run.

The business continues to increase its retained earnings year on year, and this is because they are

making huge profits and not declaring any dividends.

Ratio Analysis

The business is keeping its liquidity ratios very high, which is an unhealthy practice as it means

they are keeping surplus liquid resources like cash to set off their current liabilities. The

generally accepted ratios for Current and Quick ratio are 1.5-2 and 1 respectively.
From the Solvency ratio we can deduce that the business is focused on utilizing its equity to fund

its investments. There is a constant reduction of the Debit-Equity and Debt-Asset Ratio. Usually,

a ratio of 1 is acceptable for both. However, this is dependent on the industry type and the capital

structure of the business.

The profitability ratios have been on a constant increase over the years except for the return on

equity which took a bit of a downward trend, but this is because of the increase in equity.

The Efficiency ratios are high, which indicates that the company's assets are properly utilized.

The gradual reduction shown in the Cashflow cycle days tells us that the company is able to sell

its inventory very quickly which indicates that they are making huge sales.

Data Analysis

Descriptive Analysis: The company is in a good position; they are making profits and possess

enough liquid assets to meet any immediate cash needs.

Diagnostic Analysis: The Company's cost of sales has increased year on year, and this should be

investigated as there is a possibility that this is because of increased costs like labor which is

impacting the net income. The total assets are too high which has led to a low asset turnover. The

revenues and the assets value are never the same on any of the years because the company's

assets are not used optimally to generate long-term benefits for the business. The company's tax

expenses have also been on the increasing side because they have been reducing their long-term

liabilities and increasing their equity value.

Predictive Analysis: We can see an increase in current assets and a decrease in non-current

assets on the long run this is not a good condition for a business to be in as they might fewer

long-term assets and be unable to finance their long-term liabilities. With an increase in sales
there is also an expected increase in revenue and a corresponding increase in equity which will

cause a reduction in interest expense but a steady increase in tax expense.

Prescriptive Analysis: The financial situation of the business can be further improved by

controlling the leverage and efficiency ratio as this will help the busniess with more cash for

future expansion. There is also a need to invest more in marketing to improve the sales of the

business as it could be better. Implementation of Ai, and other digital marketing initiatives to

determine future trends. Improve customer loyalty, understand customer behavior and want and

attract new customers.

Strategic Recommendations

Inventory Optimization: The Company needs to further reduce their inventory days, and this

can be achieved by introducing RFID and ERP technology into the warehouse operations. They

can also achieve this by negotiating with suppliers and vendors to deliver inventory within a

short period. This will help to improve the cash flow to the business and reduce the Cash

Conversion Cycle days.

Long Term Loans: The business should get more long-term loans rather than short term loans

as they cost less to finance in the long run. Also, interest expenses are allowable to calculate for

income tax. This will cause them to spend less on taxes going forward.

Short-Term Investment: The company needs to invest in acquiring short-term assets or short-

term investments that would generate income for the business.