Question

Choose an imaginary company and briefly describe its industry, core products or services, and
market positioning. What fictional characteristics make this company an interesting subject for
financial analysis? Calculate key financial ratios, including liquidity ratios (current ratio, quick
ratio), profitability ratios (net profit margin, return on equity), and solvency ratios (debt to equity
ratio) using the imaginary financial data. What do these calculated ratios reveal about the
financial health of the fictional company? Provide insights into the implications of the calculated
ratios. How can investors interpret these ratios to gain a comprehensive understanding of the
financial performance and stability of the imaginary company?
Solution>>>>>
AuroraTech Solutions

Industry: Technology

Core Products/Services: AuroraTech Solutions is a fictional company operating in the technology sector. It
specializes in developing cutting-edge software solutions for businesses, including enterprise resource planning
(ERP) systems, customer relationship management (CRM) software, and data analytics platforms. Additionally, the
company offers consultancy services to help clients optimize their IT infrastructure and digital transformation
strategies.

Market Positioning: AuroraTech Solutions positions itself as a leader in innovation and reliability
within the technology industry. It focuses on providing tailor-made solutions to meet the specific
needs of its clients, aiming to enhance operational efficiency, streamline processes, and drive
business growth through technology.
Imaginary Company: AuroraTech Solutions

P&L
$ in Millions 2023 2024
Revenue 12.5 15.0
Cogs -4.0 -4.5
Gross Profit 8.5 10.5
Operating expenses -4.0 -4.5
Net Profit 4.5 6.0
Balance sheet

2023 2024
Cash & Equivalents 2 3.5
Accounts Receivable 3.5 4
Inventory 1 1.2 :
Total Current Assets 6.5 8.7
Property, Plant & Equipment 3.5 4
Total Assets
Accounts Payable 102 12.7
2.2
Short-term Debt 1 1
Total Current Liabilities 3 3.2
Long-term Debt 1 0.8
Total Liabilities 4 4
Shareholders' Equity 6 8.7
Total Liabilities & Equity 10 12.7

2023 2024
Current Ratio 2.4 3.2
Quick Ratio 2.0 2.5
Net Profit Margin 0.5% 1.2%
ROE 8.5% 18.6%
Debt to Equity 1.5 1.0
Cash Flow

2023 2024
Net Income 4.5 6.0
Depreciation 1.0 1.0
Changes in Working Capital 1.0 0.7
Cash Flow from Operations 6.5 7.7
Capital Expenditure -1.0 -1.2
Free Cash Flow 5.5 6.5
Cash from Financing Activities -0.5 0.2
Net Change in Cash 5.0 6.7
Cash at Beginning of Year 2.0 3.5
Cash at End of Year 7.0 10.2
Interpretation:

The liquidity ratios reflect AuroraTech Solutions' strong ability to meet short-term obligations. The increasing
current and quick ratios over the two years indicate improved liquidity and operational efficiency. The profitability
ratios highlight the company's ability to generate profits from its operations, with net profit margins increasing from
36% to 40%. This indicates effective cost management and revenue growth strategies. The return on equity
(ROE) ratio demonstrates how efficiently the company is utilizing shareholder equity to generate profits, with ROE
remaining high at 75% in 2023 and 68.97% in 2024. The decreasing debt to equity ratio signifies a lower
reliance on debt financing compared to equity, indicating improved financial stability and reduced risk.
Overall, the financial ratios suggest that AuroraTech Solutions is well-managed, financially stable, and poised for
continued growth. Investors can interpret these ratios as indicators of the company's financial health and make
informed decisions regarding investment opportunities.
Investor insights
Over the two-year period, AuroraTech Solutions demonstrated significant growth and financial stability. The
company's revenue increased from $12.5 million in 2023 to $15 million in 2024, reflecting a 20% growth rate.
This growth was accompanied by an improvement in profitability, with net profit margins rising from 36% to 40%,
indicating efficient cost management and increased operational efficiency. Additionally, the company maintained
strong liquidity positions, as evidenced by the current ratio rising from 2.17 to 2.72, and the quick ratio improving
from 1.5 to 2.16. This indicates that AuroraTech Solutions possesses ample resources to meet its short-term
obligations. Moreover, the company's solvency improved over the period, with the debt to equity ratio declining from
0.67 to 0.46. This suggests a reduced reliance on debt financing and enhanced financial stability. AuroraTech
Solutions' ability to generate consistent profits, coupled with prudent financial management, positions it well for future
growth and investment opportunities.